The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) meeting on June 10th is highly anticipated due to the possibility of a rate cut. Favorable economic indicators are driving this expectation.
A survey by Arif Habib Limited (AHL) predicts a 200 basis point (bps) reduction in the policy rate, potentially bringing it down to 20% – last seen in March-April 2023. The AHL report highlights positive economic factors supporting a potential easing of the current stance.
The primary reason for the anticipated rate cut is Pakistan’s significant decline in inflation. Both headline and core inflation have shown remarkable improvements. Average headline inflation for the first 10 months of FY24 is down to 25.97%, compared to 28.23% last year. May 2024 inflation is expected to fall further to 13%, resulting in a high real interest rate (900 bps) – significantly above the historic 10-year average (-44 bps).
Pakistan’s external account deficit has also shown considerable improvement, narrowing by 95% to $202 million in the first 10 months of FY24. This has contributed to the PKR’s stability against the USD.
The IMF acknowledges these positive developments but emphasizes maintaining a tight monetary policy. However, they suggest reassessing the stance if inflation continues to decline and foreign exchange markets improve.
Even with a 200 bps cut, Pakistan could still maintain a relatively tight monetary policy as advised by the IMF. Given the improvements, an easing in the policy framework seems likely. This anticipated cut would not only support economic growth but also adapt to evolving economic conditions.
Yields for government securities have noticeably declined since the last monetary policy announcement in April 2024, indicating market anticipation of a potential rate cut. Both primary and secondary markets have seen decreases across various tenors. Additionally, Pakistan Investment Bond (PIB) yields have also fallen.
AHL Poll Results
An AHL survey gauging market expectations for the June 2024 policy included participants from financial and non-financial sectors.
- 73% of respondents expect a rate cut.
- 27% expect the rate to remain unchanged.
Among those expecting a cut:
- 31% predict a 200 bps reduction.
- 24% expect a 100 bps reduction.
- 11% expect a cut below 100 bps.
As the meeting approaches, all eyes are on the SBP’s decision, which could significantly impact Pakistan’s monetary policy landscape.