Brokerage house, Arif Habib Limited, says there is a strong possibility that the central bank may contemplate kickstarting the interest rate reversal cycle by implementing a 100bps cut in the upcoming policy.
In a report, issued ahead of the MPC meeting scheduled on March 18, AHL said opinions within the market are divided, with some anticipating the MPC to maintain the status quo as Pakistan is in the process of negotiating a new IMF program given that the IMF has consistently advised maintaining a tight monetary policy stance.
The brokerage house said it believes that a data-driven approach will be pivotal in forming the State Bank of Pakistan’s (SBP) decision-making process.
This approach would likely take into consideration the downward trajectory of both headline and core inflation, which we anticipate to average approximately 17 percent and 15 percent respectively (on a 12-month forward basis), resulting in significantly positive real interest rates on a forward-looking basis. This aspect was also underscored in the SBP’s previous MPS.
In the last scheduled meeting of January 2024, SBP maintained the policy rate unchanged at 22 percent citing that the decision took into consideration the frequent and substantial changes in regulated energy prices that hampered the expected decline in inflation and hindered the establishment of a sustained decrease in inflation expectations.
On the contrary, non-energy inflation continues to decrease, aligning with the expectations of the Committee. Overall, the MPC assessed that the real interest rate remains significantly positive on a 12-month forward-looking basis, given the anticipation of a continued downward trajectory in inflation.
AHL said its projections point towards a downward trajectory in headline inflation, more prominent towards the latter half of FY24.
The average MoM rate is projected to hover around 1.2 percent in 2HFY24, a decrease from the 1.6 percent average witnessed in 1HFY24. This forecast culminates in an estimated annual average of ~25 percent for headline inflation in FY24 (FY23: 29.2 percent).
Several contributing factors, including the substantial base effect, stabilization of global commodity prices, support from the stability of the PKR against the USD, and efforts to curtail the current account deficit, underpin these expectations. Moreover, the recent data released by the PBS reveals a jump in the production of LSMI for December 2023, indicating a 3.4 percent increase compared to the SPLY. The uptick in LSMI during Dec’23 marked the second successive month of improvement.
Going forward, any reversal in interest rate, coupled with continued backing from the agriculture sector, an uptick in overall demand, support from a stable PKR parity, and the economic direction that is to be provided by the incumbent government, are expected to further enhance the production of LSMI.
On the external front, in 7MFY24, the CAD decreased by 71 percent YoY to $1.09 billion, a significant improvement from the $3.8 billion deficit recorded in the SPLY. Additionally, the improvement in SBP reserves, rising from $ 4.4 billion at the end of June 2023 to $7.9 billion (01-Mar-24), contributed to a 2.4 percent strengthening of the PKR against the USD. This, in turn, played a role in controlling imported inflation to a certain extent.
