Analysts predict that the State Bank of Pakistan (SBP) is likely to maintain its dovish stance, potentially implementing a third consecutive reduction in its key policy rate, supported by slowing inflation and improved macroeconomic indicators.
The SBP is set to announce its key policy rate on Thursday, September 12. In its previous two meetings, the central bank has cumulatively reduced the rate by 250 basis points.
Brokerage firm Arif Habib Limited (AHL) anticipates a 150 basis point cut, which would lower the policy rate to 18 per cent, a level last observed in February 2023 when the rate fell to 17 per cent.
According to Business Recorder, AHL’s report, based on a recent poll, reveals that 93 per cent of respondents expect a rate reduction, while 7 per cent foresee no change.
In July, the central bank’s Monetary Policy Committee (MPC) had already cut the key policy rate by 100 basis points to 19.5 per cent. At that time, SBP Governor Jameel Ahmad noted a downward trend in inflation.
August 2024 saw Pakistan’s headline inflation decrease to 9.6 per cent year-on-year, down from 11.1 per cent in July, according to data from the Pakistan Bureau of Statistics (PBS).
This return to single-digit inflation for the first time in three years has resulted in a real interest rate of approximately 1,000 basis points, providing further room for a rate cut, AHL suggests.
JS Global echoes this sentiment, predicting that the easing inflation supports the MPC’s case for another reduction in September, with a projected cut of 150 basis points, bringing the policy rate to 18 per cent.
Topline Securities’ CEO, Mohammed Sohail, expects a rate cut between 100 and 200 basis points, while Abdullah Farhan, Head of Research at IGI Securities, foresees a reduction of 150 to 200 basis points, driven by the recent decline in inflation.
Farhan also projects that inflation could rise to 13-14 per cent by year-end due to base effects, with the policy rate potentially declining to 16 per cent by December.
Ismail Iqbal Securities also supports the view that real rates remain significantly positive, indicating potential for a further rate cut. The firm anticipates a 100 basis point reduction in the upcoming MPC meeting.
Alongside the downward inflation trend, analysts note improvements in external indicators. The trade deficit narrowed slightly to $3.6 billion in the first two months of FY25. The current account deficit has significantly decreased to $162 million in July, largely due to a 48 per cent year-on-year increase in remittances, which has helped stabilise the Pakistani rupee against the US dollar.
