- Inflation dropped to 2.4% in January, a 111-month low.
- AHL sees a 50bps cut as “a logical step” for next MPC meeting.
- Sixty-two per cent of market participants anticipate a rate cut.
KARACHI: The State Bank of Pakistan (SBP) may take a cautious approach toward further interest rate cuts this month, despite declining inflation creating room for a reduction, The News reported citing analysts and surveys.
In January, the SBP lowered its benchmark interest rate by 100 basis points (bps) to 12%, marking the sixth consecutive cut and bringing the total reduction to 1,000bps since June 2024.
The central bank’s Monetary Policy Committee (MPC) is set to meet on March 10 to determine the next course of action. The decision follows the arrival of an International Monetary Fund (IMF) delegation in Pakistan on March 3 for a review of the $7 billion bailout package.
This review will focus on new revenue targets and taxation measures, which could impact inflation projections and influence the SBP’s stance on monetary easing.
Arif Habib Limited (AHL), a brokerage firm based in Karachi, noted that the significant decrease in inflation has been the main catalyst for rate cuts. In January, inflation dropped to 2.4% — the lowest level in 111 months — while February is expected to see it decline further to 2.2%.
“Given the sharp decline in inflation and stable reserves, a 50bps rate cut appears to be a logical step in the upcoming policy meeting,” the report stated.
However, with core inflation remaining elevated, the current account showing a deficit, and market yields rising, the SBP is likely to take a more cautious approach moving forward. The end of the rate-cutting cycle may be nearer than expected, it added.
“The SBP faces a delicate balancing act on March 10, weighing the need for growth against the imperative of maintaining macroeconomic stability.”
Another brokerage, Topline Securities, indicated that the central bank still has room for a further rate cut of approximately 100 bps due to a real interest rate of 300-400bps at the current policy rate of 12%. However, it anticipates that the SBP’s MPC will likely maintain the status quo in the upcoming meeting for several reasons.
Higher import figures for the last two months (averaging $5.2 billion in December and January) and a 1.6% depreciation of the rupee since November 2024 in the kerb market may prompt the SBP to pause further interest rate cuts to carefully assess the impact of previous adjustments, it said.
As of January, the real effective exchange rate reached 104.05, suggesting that the local currency may be overvalued compared with other trading and regional peers, it noted.
In a poll conducted by Topline Securities, market participants expressed varied opinions: 38% believe rates will remain unchanged, while 62% anticipate a rate cut of at least 50 bps. AHL’s survey indicated a clear majority favouring a rate cut, with 74% expecting the SBP to ease monetary policy.
Among them, 36.8% expect a 100bps reduction, 21.1% predict a substantial cut of over 150bps, 10.5% foresee a 50bps cut, and 5.3% anticipate a 75bps reduction. Meanwhile, 26.3% believe the policy rate will stay the same at 12%.
