JP Morgan expects Pakistan’s central bank to cut interest rate by 5-6% in FY25

There is substantial room for easing of Pakistan’s monetary policy and its central bank is expected to cut the benchmark interest rate by 500-600 basis points (bps) or 5-6% in fiscal year 2024-2025, according to JP Morgan — the world’s largest bank.

A recent report by JP Morgan noted that the country’s new agreement with the International Monetary Fund (IMF) has removed a key obstacle for the State Bank of Pakistan (SBP) to resume policy easing.

“In our view, periodic energy price adjustments and rate-based taxation measures (i.e., higher sales and excise taxes) should not materially affect the disinflation trend due to offsetting drags from a weaker domestic demand,” it stated.

“We expect headline CPI to moderate from 23.9% in FY24 to 9.5% in FY25. We expect the SBP to deliver at least 500-600bps of rate cuts in FY25, with potentially a front-loaded easing profile in the first half of FY25 while external conditions remain benign.”

The report also identified three key risks — rallies by the opposition, fiscal slippages due to overly optimistic revenue and GDP assumptions and ad-hoc spending increases, and public debt sustainability.

It pointed out that concerns remain that lingering foreign currency restrictions have artificially suppressed the exchange rate volatility.

However, an IMF report in May observed that the government has eliminated all control over the exchange rate, despite which the Pakistani rupee has remained stable as evidenced by the lack of premium in the informal market.

The country’s import bill has also only risen gradually, suggesting limited pent-up import demand. As such, barring a significant deterioration in the current account, JP Morgan expects any negative foreign exchange adjustment will be minor.