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PKRV drops up to 60bps in 2 sessions as MPC nears

SBP maintains rate of Special Cash Reserve Account at 4.32% for May
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April 24, 2024 (MLN): The secondary market yields (PKRV) in the past two days have recorded a significant drop of up to 60 basis points across different tenures as the central bank’s monetary policy meeting nears.

The 3-month,  6-month, and 12-month yields dropped by 11bps, 20bps, and 60bps, respectively.

Additionally, other tenure yields such as 2-year, 3-year, and 5-year also declined by up to 21 basis points.

With inflationary pressures easing in the economy and the real interest rates turning positive, many market participants strongly expect the State Bank of Pakistan (SBP) to shift towards monetary easing soon.

The Consumer Price Index (CPI) for March 2024 showed that inflation slowed to a 22-month low of 20.7% due to the high base effect, on which the real interest rate turned positive for the first time in over three years.

These soft inflation numbers signaled that the central bank may finally conclude its long and aggressive fight against inflation, which resulted in the policy rate reaching a record level of 22% in June 2023.

It is crucial to note that the interest rate in the economy has been maintained at that peak for six consecutive meetings.

As a greater drop is witnessed in the 6-month and 1-year yield, this suggests that the most probable scenario for a rate cut is by June or onwards.

According to Citi Bank, the central bank is most likely to delay the rate cut until June in order to grasp more clarity on the implication of the budget for the fiscal year 2024-2025 (FY25) on inflation.

Another factor supporting the decision to delay rate cuts is the recent alarm from the International Monetary Fund (IMF), warning countries to ensure that they are durably back to their inflation targets and not to ‘cut prematurely’.

Moreover, the latest survey conducted by Mettis Global News to gauge market sentiment regarding the upcoming central bank’s monetary policy decision also showed that most participants (51.9%) expect the SBP to maintain the policy rate.

In the previous survey conducted in March, 62.5% of participants expected a rate cut in the April meeting. This reflects a dropping trend, with people now assessing the central bank to remain cautious before considering a rate cut.

However, Arif Habib, Pakistan’s business magnate and founder of the Arif Habib Group has called for an immediate reduction in interest rates to bolster the economy by easing borrowing pressures on the business sector.

Analyzing the position of yields further in the money market, the benchmark 6-month Karachi Interbank Bid and Offer rates have also recorded a drop of 14bps in these two sessions.

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Posted on: 2024-04-24T21:45:05+05:00