Is rate cut finally in the offing?

March 14, 2024 (MLN): All eyes are on SBP again. Little gains in economic stability are being applauded and visibly noticed. After the successful conclusion of the elections and the formation of the government with the coalition of leading parties is giving confidence to the capital markets.

So has the appointment of a top Banker, Aurangzeb Khan to lead as finance czar.

Economic data CPI for February clocked in at 23% while March's is expected to be 19-20% with the base effect wearing off, the inflation path on a YoY basis is on a sustainable downward trajectory. Thanks to largely stable PkR parity vs USD that has remained at PKR 280/USD for exactly a year now.

Similarly, the current account is likely to be in surplus for the next two months as the Ramadan effect pours in further remittances in March and April. 

So what should SBP do? The Finance Minister has hinted already the rate cut is on its way. Well, it should have been down in February anyway because the biggest effect of high-interest costs is on the sovereign federal budget itself.

Nearly all of the tax receipts are heading towards paying interest costs thereby complicating the fiscal sustainability in the country. The marginal cut of 100bps will give relief to federal govt and indebted borrowers at the brink of default. 

Whether SBP kicks the can to the policy on April 29th once IMF is actively engaged and lobbied for another bailout package for the medium-term or even later is entirely a subjective call now.

Wary of not dismaying IMF's staff team that is landing in Pakistan now, maybe SBP could show an active prudent monetary tightening stance especially when other emerging countries such as Nigeria and Egypt are seeing pressure on domestic currencies. 

Reducing the policy rate from 22% to 21% will not cause a resurgence in imports nor add material pressure on demand for USD or imports thereby upending the presumed "inflation stability" that - I repeat - is largely a function of currency depreciation and utility prices.

Both factors have less impact on high monetary policy and more due to low exports and structural inefficiencies in the energy sector. 

SBP must bring optimism back and show confidence in the inflation outlook by cutting 100 bps. A 21% interest rate is already high enough to please the IMF and ensure "proactively tight monetary policy". Let the poor debtors (including govt) breathe a sigh a relief finally.

Or perhaps SBP would make us wait until April 29th and save some more dollars and wait for March's CPI. A lot of damage is done with interest rates in 20s% - defaults are looming even after a 100 bps cut.

The author is an independent economic analyst and writes on Twitter and Linkedin.