The State Bank of Pakistan (SBP) is expected to continue its rate-cutting cycle but may implement a more moderate reduction in the upcoming monetary policy decision, according to a survey by a leading brokerage house, Arif Habib Limited (AHL). As inflation decreases and external sector stability improves, the SBP could lower its key policy rate by up to 100 basis points (bps) in the near future, the survey suggests.
In the survey, a significant 36.8% of respondents predicted a 100 bps reduction in the policy rate, while 21.1% anticipated a 150 bps cut, and 10.5% foresaw a smaller 50 bps reduction. The data also revealed that 74% of the participants supported the idea of a rate cut, while the remaining 26% believed that the policy rate would remain unchanged at its current level of 12%.
The SBP’s most recent decision was to reduce the policy rate by 100 bps, bringing it down to 12%. This marked the seventh consecutive rate cut since June 2024, amounting to a cumulative reduction of 1000 bps. With the next Monetary Policy Committee (MPC) meeting scheduled for March 10, market participants are eagerly awaiting further direction from the central bank.
According to AHL, while the easing cycle is not expected to end immediately, the room for significant reductions is diminishing. “We believe that the easing cycle is not over yet, but the runway for further rate reductions is getting shorter,” the brokerage firm noted in its report. It is forecasting an additional 50 bps reduction in the upcoming monetary policy review, which would bring the policy rate down to 11.5%.
The brokerage house argues that the sharp decline in inflation and the stability of foreign exchange reserves make a 50 bps rate cut a logical step for the central bank. This anticipated reduction would follow a period of aggressive rate cuts initiated in June 2024, aimed at stimulating economic activity amidst challenging conditions.
While the easing trend has been fueled by improved inflation data and external sector stability, AHL raised concerns about emerging risks that could prompt the SBP to shift toward a more cautious approach in the near future. “With inflationary pressures likely to re-emerge and market yields creeping up, the end of the rate-cut cycle may be closer than anticipated,” the report warned.
The brokerage firm also highlighted several factors that could influence the SBP’s stance moving forward. These include the persistence of elevated core inflation, a rising current account deficit, and the gradual increase in market yields. Given these challenges, the SBP may adopt a more measured approach to monetary policy in the coming months.
The survey respondents included a diverse group of participants from both the financial and non-financial sectors, such as banks, asset management firms, insurance companies, and development finance institutions. Non-financial sectors included industries like exploration and production, cement, fertilisers, steel, textiles, and pharmaceuticals.
As the SBP prepares to make its next monetary policy decision, market analysts and financial institutions are keeping a close watch on the central bank’s actions, as any shift in direction could have significant implications for Pakistan’s broader economic outlook. While the current trend of rate cuts has provided relief to borrowers and businesses, it seems the SBP is now entering a phase of cautious recalibration, where the focus may shift towards balancing inflation control with economic growth.