Karachi, October 23, 2024 – The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) is expected to further reduce the policy rate by 200 basis points (bps) or 2% in its upcoming meeting scheduled for November 4, 2024. This insight comes from a recent survey conducted by Arif Habib Limited, capturing the sentiment of market participants across various sectors.
The survey, aimed at gauging market expectations ahead of the monetary policy announcement, included respondents from a range of industries, including financial services (banks, asset management companies, insurance firms, and development finance institutions) and non-financial sectors such as cement, fertilizers, exploration and production, textiles, steel, and pharmaceuticals.
The survey results strongly indicate anticipation of a rate cut. According to the data:
• 100% of respondents expect the SBP to lower the policy rate.
• Of those forecasting a cut, 61.1% expect a 200 bps reduction, while 25% predict a more aggressive 250 bps cut. 13.9% expect a slightly smaller cut of 150 bps.
Analysts at Arif Habib Limited also support the prediction of a 200 bps rate cut, which would reduce the policy rate to 15.5%—a level not seen since November 2022, when the rate was 16%. Should this happen, it would mark a cumulative reduction of 650 bps since June 2024, aligning with the historic cuts seen between July 2001 and November 2002.
This would also be the fourth consecutive rate cut since the SBP began reversing its tight monetary stance earlier this year. The shift in policy is driven by an improving macroeconomic environment, particularly the sharp decline in inflation. Inflation fell to 6.9% in September 2024, a 44-month low, and is expected to decrease further to 6.3% in October 2024.
Additionally, Pakistan’s Current Account Deficit (CAD) in 1QFY25 dropped to USD 98 million, a 92% year-on-year decrease, compared to the USD 1,241 million deficit in the same period last year. A 38.8% year-on-year increase in remittances during 1QFY25 has further helped stabilize the current account.
The anticipated rate cut is also seen as a response to sluggish output, with Large Scale Manufacturing (LSM) showing a 0.9% year-on-year decline for the first two months of FY25. Lower interest rates could help industries reduce production costs and stimulate demand.
SBP’s foreign exchange reserves have also strengthened, rising to USD 11.0 billion from USD 7.7 billion a year ago, buoyed by the first tranche of USD 1.0 billion from the IMF’s 37-month Extended Fund Facility (EFF). This improved reserve position reduces the risk of currency volatility, with the rupee appreciating 0.26% FYTD.