SBP widely expected to slash rates by another 200bps

August 30, 2024 (MLN): The State Bank of Pakistan (SBP) is widely expected to cut its policy rate further by 200 basis points (bps) on November 4, as per the projections put forth by various brokerage houses/market analysts.

That would take the cumulative reduction since June to 650bps, bringing the policy rate from 22% in May 2024 to 15.5%—a level last seen in November 2022.

The primary driver is the significant drop in inflation, which fell to 6.9% in Sep’24 (44-month low) and is expected to ease further to 6.3% in October 2024, said brokerage house Arif Habib Limited.

In Q1 FY25, the CAD decreased to $98 million, an 92% YoY drop from the $1,241m deficit recorded during the same period last year.

Additionally, a 38.8% YoY increase in remittances during Q1FY25 has been instrumental in maintaining a low overall current account deficit, AHL noted.

To support declining output, as indicated by a 0.9% YoY decrease in LSM growth for 2MFY25, the rate cut will help industries lower their production costs, thereby facilitating a revival in demand, it added.

In addition to current account improvements, SBP's reserves have risen to $11.0 billion from $7.7bn a year ago, thanks to the IMF's first tranche of $1.0bn from the 37-month EFF facility received in Q1 FY25.

AHL said this boost enables the SBP to cut interest rates while reducing the risk of currency destabilization, with the currency appreciating by 0.26% FYTD.

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