Next week’s meeting of the State Bank of Pakistan (SBP)’s Monetary Policy Committee is likely to announce a fifth consecutive cut to the policy rate, as inflation continues to decline at a much faster pace than anticipated.
Pakistan’s interest rate peaked at 22% in June 2023 in a bid to control rampant inflation and introduce monetary discipline. In June 2024, the central bank slashed the policy rate to 20.5% as inflation slid to 12.6% from its own backbreaking peak of 38% in May 2023. A month later, the central bank further reduced the interest rate to 19.5%. In September, the policy rate was reduced to 17.5% and, in October 15%, its lowest value in 29 months. In total, the central bank has cut the policy rate by 700 basis points in the last four meetings of its Monetary Policy Committee.
Citing the consecutive cuts, and a reduction of inflationary pressures, analysts expect the Dec. 16 meeting of the Monetary Policy Committee to unveil yet another rate cut to boost the economy. Most observers are expecting a 200 basis points cut, though some optimistic elements believe it could be closer to 250. The central bank will likely exercise caution, however, as a 250-point cut would boost market expectations for an even greater cut in January, especially if the inflation rate continues to be recorded in the single digits.
The Pakistan Bureau of Statistics recorded 4.9% year-on-year inflation in November, a 79-month low, owing to a high base effect and supply stability. Prior to this, the lowest recorded year-on-year inflation, 3.96%, was in April 2018. This leaves a gap of 10.1% between the prevailing policy and inflation rates, leaving the central bank sufficient cover for a substantial rate cut this month.
Dampening expectations, brokerage house Topline Securities has issued a report saying it expects the central bank to maintain a positive real rate of 300-400 basis points to absorb any potential impact from a “mini budget” or external shocks. This suggests a minimum interest rate of 9-10% if inflation continues to circle around 5-6%. The central bank also wants to prevent the economy from overheating, especially during a stability-oriented IMF program.
Supporting a reduced rate are expectations of businesses and the government, which proved the largest beneficiary of previous cuts. According to State Bank of Pakistan Governor Jameel Ahmad, the government started the fiscal year with an expectation of repaying around Rs. 9.7 trillion in principal and interest payments on external and domestic loans. The easing of the monetary policy has seen this figure decline to nearly Rs. 8.4 trillion. This has partially helped the country achieve a current account surplus for the past three months. In the first quarter, the overall budget balance was recorded at around Rs. 1.8 trillion against fiscal deficit of Rs. 980 billion in the corresponding period last year, according to the Ministry of Finance.
Expectations of further cuts have already seen rates for six-month KIBOR and Treasury bills decline by 74-81 basis points since the November meeting, currently hovering at 12.59 percent and 12.16 percent, respectively.