The State Bank of Pakistan (SBP) is expected to cut the monetary policy rate this month after 5 consecutive cuts in its previous five meetings last year.
“Given the current economic conditions, we anticipate a 100bps rate cut in the upcoming monetary policy meeting of Jan’25. This would bring the policy rate down to 12%”, Arif Habib Limited said in a report.
This comes as Inflation in Pakistan is showing a significant downward trend, with headline inflation projected to ease to 3.06% in January 2025, marking the lowest level in ~9 years. This follows a YoY inflation of 4.1% in December 2024, which was already an 80-month low. For context, inflation was a staggering 29.7% during the same period last year.
Inflation is expected to remain below 5% through April 2025, driven by the favorable base effect. However, a reversal in this downward trend is likely in May and June, with inflation projections rising to 8.81% and 8.97%, respectively. This uptick is expected as the base effect dissipates after 1QCY25, pushing inflation upward.
The sharp decline in inflation is attributed to several key factors, including the high base effect, PKR.
Key Indicators Support Expectations of a 100bps Rate Cut
- The significant decline in inflation remains the primary driver behind this anticipated rate cut.
- The current account posted a surplus of USD 729 million in November 2024, the highest in nearly 10 years and the second-largest since July 2013. This marks a turnaround from the USD 148 million deficit recorded in November 2023. For 5MFY25, the current account surplus stands at USD 944 million, a sharp contrast to the USD 1.68 billion deficit during the same period last year.
- Remittances have increased by 34% YoY in 5MFY25, totaling USD 14.8 billion, further strengthening Pakistan’s external position.
- Moreover, a rate cut would help lower production costs for industries, boosting demand, which has been constrained by high costs. This is particularly relevant in light of the 0.6% YoY decline in LSM growth in the 4MFY25.
- SBP’s foreign exchange reserves have grown to USD 11.7 billion by December 27, 2024, up from USD 9.4 billion in June 2024. This increase is largely due to the IMF’s first tranche of USD 1 billion from the 37-month Extended Fund Facility (EFF) and inflows from institutions like the ADB. The boost in reserves provides SBP with the cushion needed to cut interest rates while mitigating the risk of currency destabilization.
The real interest rate is projected to reach 9.98% in January 2025, significantly higher than its historical average of ~2.5%. Additionally, the historical spread between policy rate and core inflation has averaged around 1.7% over the past nine years. These indicators suggest that the SBP has substantial room for further rate adjustments.
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Lying as usual
Prices are record high
People cannot afford anything
Inflation is not the issue . Prices are.
Decreasing interest rates won’t affect consumption since no one can afford anything .