SBP widely expected to slash rates further

July 29, 2024 (MLN): The State Bank of Pakistan (SBP) is widely expected to cut its policy rate by 100 basis points (bps) later today, as per the projections put forth by various brokerage houses/market analysts.

Since the last monetary policy meeting, the country has secured a 37-month International Monetary Fund's (IMF) Extended Fund Arrangement (EFF) worth $7 billion.

The EFF program is expected to unlock financing from major bilateral and multilateral partners as well, which will help in further build-up of FX buffers.

Moreover, a reduction in the current account deficit has helped improve the FX reserves to around $9bn despite large debt repayments and weak official inflows.

Pakistan's current account recorded its smallest deficit in 13 years during FY24 amid robust growth in remittances and exports, which more than offset the uptick in imports.

Furthermore, the average inflation of FY24 slowed to 23.4% YoY compared to 29.2% YoY in FY23. While inflation stood at 12.6% YoY in June 2024.

The real interest rates still remain significantly positive, which is important to continue guiding inflation to the central bank's medium-term target.

July 2024 is projected to see inflation fall further to around 10.5%, which would result in a real interest rate of 1,000bps—far surpassing the historic 10-year average of -44bps, brokerage house Arif Habib Limited (AHL) noted in its MPS preview report.

"We’re expecting a 100bps cut that could lower the policy rate to 19.5%, a level not seen since March 2023," AHL said.

Similarly,  brokerage house Sherman Securites in its report said, "The real interest rate for the ongoing month stands at 10.5%, higher than previous month of 7.9%. This will enable SBP to further reduce policy rate by 100-bps."

To recall, in the last MPC meeting held on June 10, the committee slashed interest rates by 150bps to 20.5% after holding it at a record 22% for a year.

The reduction was the first in almost four years after what has been the most aggressive fight against soaring inflation.

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