Topline Survey Shows Strong Expectation of SBP Policy Rate Cut

Topline Survey Shows Strong Expectation of SBP Policy Rate Cut – A recent survey by Topline Research suggests a significant shift in market expectations regarding the State Bank of Pakistan’s (SBP) upcoming Monetary Policy Committee (MPC) meeting scheduled for June 10th, 2024.

Overwhelming Anticipation for Rate Cut

The survey reveals a dramatic increase in anticipation for a policy rate cut. A staggering 88% of participants believe the SBP will reduce rates, compared to just 49% in the previous MPC meeting.

Range of Cuts Expected

The survey dives deeper, indicating that 34% of those expecting a cut anticipate a substantial reduction of 200-300 basis points from the current 22%. This is a notable change from the last survey, where no participants expected such a significant decrease. A more modest cut of 100 basis points is predicted by 43% of respondents, aligning with the previous survey’s findings.

Investor Optimism on Long-Term Rates

Investor sentiment also reflects optimism. Nearly half (49%) of investors now predict the policy rate to fall between 16-18% by December 2024, up from 41% in the last MPC meeting. This confidence is likely fueled by the higher-than-expected drop in inflation for May 2024.

Additional Survey Insights

The survey delves into broader economic concerns. A significant portion (62%) believes the International Monetary Fund (IMF) will reach a Staff Level Agreement (SLA) with Pakistan by July 2024. Regarding currency depreciation, predictions vary, with 41% expecting a 2-6% annual depreciation of the Pakistani Rupee (PKR) and 38% anticipating a steeper 6-8% range.

Crucial Timing for MPC Meeting

The timing of this MPC meeting is particularly critical. It coincides with both the announcement of the Federal Budget for FY25 (expected June 12th, 2024) and ongoing discussions with the IMF for a new funding program. The SBP Governor previously emphasized a data-driven approach for MPC decisions, considering staff projections, budgetary developments, and the IMF program in shaping inflation expectations.

High Real Interest Rates

Real interest rates have reached a 22-year high of 10.2 percentage points in May 2024, significantly exceeding the historical average of 2-3 percentage points. This spike follows a sharp decline in inflation, which fell to 11.8% YoY in May 2024, marking the second-largest historical month-on-month decline of 3.24 percentage points.

Falling KIBOR and Treasury Bill Rates

Declining inflation expectations have led to a decrease in the 6-month Karachi Interbank Offered Rate (KIBOR) and Treasury bill rates by 38-46 basis points since the last MPC meeting on April 29, 2024. KIBOR has significantly decreased by 3.8 percentage points from its peak of 24.71% on September 13, 2023. Similarly, the 6-month T-Bill rate has dropped by 3.92 percentage points from its peak of 24.51% on September 7, 2023.

Predicted Rate Cut and Outlook

Topline Research predicts a high likelihood of a rate cut in the June 10th MPC meeting, possibly ranging from 100-200 basis points. This would bring the real rate down to 8.2-9.2 percentage points, still above the historical average. This buffers potential inflation shocks arising from food price movements, budgetary measures, and IMF-recommended revenue measures. The policy rate is expected to decline further, reaching 15-16% by June 2025, with an assumed real interest rate of 300-400 basis points as inflation is projected to average 13-13.5% in FY25.

Key Factors for SBP Decision

The recent drop in CPI, declining KIBOR and secondary market yields, and a current account surplus for April 2024 will likely be crucial factors influencing the SBP’s upcoming decision.