SBP expected to cut rates by 100bps: Poll

June 07, 2024 (MLN): The State Bank of Pakistan (SBP) is widely expected to cut its policy rate by 100 basis points (bps) on June 10, as per the projections put forth by various brokerage houses/market analysts.

The central bank has kept borrowing costs at a record 22% since June 2023. The reduction would be the first in almost four years after what has been the most aggressive fight against soaring inflation.

A Mettis Global poll found all ten analysts predicting a cut. Six (median) analysts forecast a 100 bps reduction, three analysts expect up to a 150 bps cut, and one expects a 200 bps decline.

The decision will come just before the federal budget 2024-25.

Arif Habib Limited (AHL) said its forecast is underpinned by several favorable economic indicators, suggesting a conducive environment for initiation of reversal in monetary stance.

One of the primary factors supporting the expectation of a rate cut is the downward trajectory of Pakistan's inflation.

To recall, headline inflation fell to 11.8% in May compared to last year; taking the average inflation in eleven months of current fiscal year to 24.9% as against 29.0% in 11MFY23.

This took the real interest rate above 1,000bps — substantially higher than the historic 10-year average of negative 44bps.

On the external front, the current account deficit has shown remarkable improvement during 10MFY24, narrowing by 95% to $202 million.

This significant reduction has contributed to the stability of the PKR against the US dollar.

In its recent country report, the IMF has acknowledged these positive economic developments but has emphasized the importance of maintaining a tight monetary policy to ensure continued stability.

However, the IMF also suggested that the stance could be reassessed if Pakistan's inflation continues to decrease and improvements in the foreign exchange market persist.

Even with a potential rate cut of 200bps, Pakistan would still align with the IMF's stance on maintaining a relatively tight monetary policy, AHL said.

It added that given the improvements in inflation and the external account, it is plausible to foresee an easing in the monetary policy framework.

The anticipated rate cut would not only support economic growth but also align with the evolving economic conditions, AHL stressed.

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