MPS Preview: SBP to ease policy rate further

July 26, 2024 (MLN): The State Bank of Pakistan (SBP) will probably cut its policy rate for the second straight meeting on Monday in a bid to spur growth, as the significant slowdown in inflation gives policymakers additional room to continue monetary easing.

The anticipated decline in the policy rate, likely by 100 basis points (bps), stems from the following key developments.

Since the last monetary policy meeting, the country has secured a 37-month International Monetary Fund's (IMF) Extended Fund Arrangement (EFF) worth $7 billion.

The EFF program is expected to unlock financing from major bilateral and multilateral partners as well, which will help in further build-up of FX buffers.

Moreover, a reduction in the current account deficit has helped improve the FX reserves to around $9bn despite large debt repayments and weak official inflows.

Pakistan's current account recorded its smallest deficit in 13 years during FY24 amid robust growth in remittances and exports, which more than offset the uptick in imports.

Furthermore, the average inflation of FY24 slowed to 23.4% YoY compared to 29.2% YoY in FY23. While inflation stood at 12.6% YoY in June 2024.

The real interest rates still remain significantly positive, which is important to continue guiding inflation to the central bank's medium-term target.

It is worth mentioning here that the core consumer price index — a measure that excludes food and energy to make it easier to see the underlying inflation trend — still remained sticky at 18.9% in FY24 compared to 17.8% last year.

Meanwhile, Pakistan's economy grew at a slower pace this year than the budgetary projection. GDP growth has been provisionally estimated at a moderate 2.4% this year, compared to the 3.5% target.

The country has set a growth target of 3.6% for the next fiscal year, which would require continued monetary easing to avoid falling short once again.

To recall, in the last MPC meeting held on June 10, the committee slashed interest rates by 150bps to 20.5% after holding it at a record 22% for a year.

The reduction was the first in almost four years after what has been the most aggressive fight against soaring inflation.

To gauge market sentiment, Mettis Global News conducted a survey regarding the upcoming central bank’s monetary policy decision.

Only one analyst out of 12 predicted that rates would be left unchanged at 20.5%. The rest expect the central bank to cut rates on July 29, 2024.

However, opinions are divided, with respondents equally split between a 100bps cut and a 150bps reduction.

Meanwhile, a majority of analysts expect a cumulative rate cut of 350bps or higher over the next four meetings.

Money Market Yields

Since the last monetary policy meeting, the secondary market has seen a sharp decrease in yields across all tenors.

The 3-month yields have fallen by 57bps, the 6-month by 70bps, and the 12-month by a significant 138bps, respectively.

In the primary market, Market Treasury bills (MTBs) yields have also witnessed a fall across all tenors.

Cut-off yields in the latest auction stood at 19.4899% (-56bps) for 3 months, 19.2891% (-50bps) for 6 months, and 18.2389% (-30bps) for 12 months.

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