MPS Preview: SBP to stand firm on 22% despite inflation moderation

March 12, 2024 (MLN): The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) is widely expected to maintain the policy rate at 22% for the sixth consecutive meeting on Monday.

However, the recent moderation in inflation may set the stage for a potential rate cut.

For the first time in over three years, the real interest rate (RIR) is likely to enter positive territory this month, as the favorable base effect and record high interest rates continue to slow down inflation pace.

Should the consumer price index (CPI) rise by less than 2.82% this month, RIR will dip below the 22% policy rate.

The current RIR, the difference between the policy rate and inflation, has narrowed to just -1.06%, the smallest since May 2022.

However, the SBP may wait until at least April before cutting rates.

To gauge market sentiment, Mettis Global News conducted a survey regarding the upcoming central bank's monetary policy decision, which is scheduled to be held on March 18.

The survey results imply a status quo, with the majority of participants (57.5%) expecting the SBP to maintain the policy rate at 22%.

This aligns with the previous MPC survey, where 57.7% of participants foresaw a status quo.

This means that the survey indicates a shift in market sentiment, with a greater inclination towards anticipating rate cuts in the second quarter of 2024, a departure from previous expectations set for the first quarter.

A notable change from the last survey is the significant drop in the proportion of participants expecting a cumulative rate cut of 300-700 basis points by the end of FY24, now down to just 17.5% as against 60.6% earlier.

Market participants now believe the central bank would cut rates after real interest rates turn positive, contrasting with the earlier survey's outcome.

To recall, in the last scheduled meeting of January 2024, SBP maintained the policy rate unchanged at 22% citing that the frequent and sizeable adjustments in administered energy prices have slowed down the pace of decline in inflation anticipated earlier, besides impeding a sustained decrease in inflation expectations.

Inflation forecast

If consumer prices rise an average 0.5% a month for the remainder of the current fiscal year, the annual inflation will drop to about 16.7% by June end.

With a 1% monthly increase, the annual inflation will fall to about 19% by June.

The following chart maps out the yearly inflation trajectory based on monthly inflation rates of 0.5%, 1%, 1.5%, and the 12-month average of 2%

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