September 09, 2024 (MLN): The State Bank of Pakistan (SBP) is expected to cut its policy rate by 150 basis points (bps) as a significant slowdown in inflation gives policymakers enough room to continue monetary easing in a bid to spur growth.

That would be the third consecutive rate cut since June 2024.

Pakistan’s annual inflation rate fell to 9.6% in August from 11.1% last month, expanding the real interest rate to 9.9%, which is important to continue guiding inflation to the central bank’s medium-term target.

This took the average inflation of 2MFY25 to 10.4%, a significant decline from 27.8% in 2MFY24.

The average core inflation —  a measure that excludes food and energy to make it easier to see the underlying inflation trend — rose 11.9% as compared to an annual increase of 13.8% in the previous month.

Global oil prices have also plummeted in the past few weeks on concerns over US economic growth and a likely rise in supplies out of Libya. Oil benchmark Brent fell 8% last week — its steepest drop since October 2023.

This would provide further relief and help Pakistan’s trade balance and inflation figures. Based on the data from the first week, the government will likely cut fuel prices for the fourth consecutive fortnight.

Furthermore, since the petroleum import bill constitutes the dominant portion of Pakistan’s total imports (28.5% in FY24), a reduction in the import bill from lower international prices could ease the negative trade balance and reduce pressure on the country’s limited dollar reserves.

Meanwhile, the country’s economic growth remains sluggish. 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.

Pakistan’s Large-scale Scale Manufacturing Industries (LSMI) output growth rebounded in fiscal year 2023-24 driven by improved confidence and recovery in various sectors, however, the pace of growth remains below the necessary threshold.

LSM dominates the manufacturing sector of GDP, accounting for 69.3% of Manufacturing and 8.2% of the overall GDP.

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

Majority (77.8%) of analysts expect the central bank to slash rates by 150bps to 18%.

Moreover, a majority of analysts expect a cumulative rate cut of 350bps or higher over the next three meetings, taking the policy rate to 16% or lower by end-December 2024.

To recall, in the last MPC meeting held on July 29, the committee slashed interest rates by 100bps to 19.5%.

The reduction was the second in a row, bringing the total decrease since June 2024 to 250bps.

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 163bps, the 6-month by 151bps, and the 12-month by 121bps. Longer-term bonds have also decreased, with the 10-year, 15-year, and 20-year seeing declines of 76bps, 69bps, and 71bps, respectively.

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

Since the July MPC meeting, T-bill yields have fallen to 17.4799% (-149bps) for 3 months, 17.7399% (-101bps) for 6 months, and 16.9989% (-74bps) for 12 months.

Copyright Mettis Link News

Posted on: 2024-09-09T11:03:28+05:00