The State Bank of Pakistan (SBP) is gearing up for a significant monetary policy decision as the Monetary Policy Committee (MPC) convenes on Monday, July 29, 2024. Anticipation is high that the SBP will cut the policy rate by 100 basis points, bringing it down to 19.5%.
Governor Jameel Ahmad is expected to announce this crucial decision at a press conference following the MPC meeting. A recent poll by Topline Securities shows that 75% of market participants predict a rate cut, with 60% specifically forecasting a 100 basis point reduction. This move aligns with expectations of inflation dropping to 11% in July 2024, which would support the rate cut.
If implemented, this would be the second consecutive rate cut following a 150 basis point reduction in the previous meeting. This series of cuts marks a shift in policy after a long period of stability since June 2020.
Topline Securities projects further rate cuts by June 2025, potentially lowering the policy rate to between 15% and 16%. These projections are based on an expected real interest rate of 300-400 basis points and an average inflation rate of 13% to 13.5% for the fiscal year 2025.
Currently, the real interest rate is about 790 basis points, considering an inflation rate of 12.6% as of June 2024. With the expected cut in July, this rate could adjust to around 850 basis points, giving the SBP flexibility to handle external economic shocks or the delayed impacts of fiscal policies.
Supporting this anticipated rate cut, both the six-month Karachi Interbank Offered Rate (KIBOR) and six-month Treasury Bills rates have decreased by 83-84 basis points since the last MPC meeting on June 10, 2024. These rates now stand at 19.84% and 19.52%, respectively.
IMS Research also forecasts a 100 basis point cut, bringing the policy rate to 19.5%. Their inflation estimates suggest the Consumer Price Index (CPI) will be around 10.8% in July, with a three-month average from May to July at 11.5%. Despite recent tariff adjustments and fiscal measures, inflation is expected to stabilize between 11% and 13% throughout the fiscal year 2025.
Pakistan’s recent agreement with the International Monetary Fund (IMF) for a 37-month Extended Fund Facility (EFF) worth approximately $7 billion is another key factor. This deal is expected to bolster the SBP’s foreign exchange reserves and could increase imports due to further monetary easing. The EFF is also anticipated to help Pakistan access additional international debt markets.
The government’s tight fiscal stance has created room for monetary easing to stimulate economic growth. The Federal Board of Revenue (FBR) is targeting a 40% year-on-year increase in tax collection for FY25, driven by new taxes and the rationalization of previous exemptions.
Market analysts predict a positive response from the equity market to continued monetary easing. After a recent 3.5% correction in the KSE100 Index due to political uncertainties, lower interest rates could spark institutional buying, boost liquidity, and enhance earnings growth in cyclical sectors due to lower commodity prices and reduced finance costs.
However, global economic conditions, particularly the cautious approach of major central banks like the US Federal Reserve and the European Central Bank, may influence the timing of the SBP’s monetary easing. Additionally, political instability in Pakistan could impact fiscal performance and delay external financial assistance, potentially necessitating a pause in planned rate reductions.
As the SBP prepares for its MPC meeting, all eyes will be on Governor Jameel Ahmad’s announcement, which could signal a pivotal shift in Pakistan’s economic strategy.