Pakistan central bank expected to reduce interest rate by 50-100bps

Even though the State Bank of Pakistan (SBP) has been aggressively slashing the key policy rate since last year, analysts and brokerage houses expect it to cut it further by 50-100 basis points (bps) in the upcoming Monetary Policy Committee meeting on March 10.

According to a survey of 14 analysts at brokerage houses, mutual funds, banks, and investment institutions, only three said the central bank was unlikely to change the rate.

Of the total analysts, one was of the opinion that the rate will be reduced between 50-100bps, four said the interest rate might see a clipping of 50bps while six expected the central bank might again cut the rate by 100 bps.

The SBP kicked off the monetary easing cycle in June 2024. Since then, the rate has been reduced by 1,000bps in six consecutive meetings to 12% — a more than two-year low.

The central bank decided to reduce the rate mainly on back of the drastic slowing of inflation rate in the country. In May 2023, it peaked at 38%. However, it started easing from January 2024, reaching 1.5% in February this year.

The real interest rate now stands at 10.5%, giving the SBP substantial room for a further rate cut.

However, brokerage house Topline Securities, in their latest research report, said that the central bank will observe status quo in upcoming meeting owning to following reasons: the International Monetary Fund review during which new revenue targets and budgetary taxation measures will be set, which may affect the inflation outlook for the next fiscal year.

Secondly, higher import numbers of last two months along with PKR depreciation of 1.6% since Nov in kerb market may pause the further interest rate easing on prudent basis to further analyze the impact of previous easing.

Moreover, the Real Effective Exchange Rate (REER) has reached 104.05 in Jan which signals relatively overvalued status of PKR compared to other trading/regional peers.

“We maintain our interest rate target of 11% for Dec 2025,” the report said.

The report further said that the secondary market indicators also shows interest rate cut cycle is likely to bottom out soon as six months KIBOR and treasury bills have increased by 21-24bps since last MPC meeting with rate/yield of 11.85%/11.73%.

Meanwhile, Sana Tawfik, head of research at Arif Habib Limited, said that the SBP is expected to continue its rate-cutting cycle with a 50bps reduction in the upcoming monetary policy review, bringing the policy rate to 11.5%.

However, the easing cycle may now enter a more cautious phase as underlying inflationary pressures persist.

“While headline inflation remains low, much of this disinflation is attributed to base effects, which are likely to fade in the coming months,” she said. Core inflation remains sticky, averaging 10.6% in seven months of the current fiscal year and are projected to stay within the 8-9% range for the rest of the fiscal year, Tawfik said.

Additionally, a rising import bill and recent PKR depreciation signal potential risks to further rate cuts. Given these factors, SBP is likely to adopt a measured approach, balancing the need for economic support with macroeconomic stability.

“We expect SBP to reduce policy rate by 100bps in upcoming monetary policy as lower inflation numbers, declining commodity prices — mainly oil — and satisfactory IMF review meetings creates room to reduce policy rate,” said Ali Nawaz, chief executive officer of Chase Securities.