Pakistan’s central bank expected to slash interest rate by 150 bps

Pakistan’s central bank is likely to cut interest rates by 150 basis points to 18%, over a dozen analysts surveyed by Nukta suggests.

The expectation is primarily backed by the declining inflation trend where the August CPI print of 9.6% was the first single digit inflation number in almost 3 years. Real interest rates now stand at almost 10% providing significant room to the central bank to slash rates.

Monetary policy committee (MPC) at State Bank of Pakistan (SBP) will decide the interest rate on September 12, 2024, and this would be the third consecutive rate cut since the monetary easing cycle began in June 2024.

Analysts say August inflation fell to a single digit of 9.6%, resulting in a real interest rate of 10%, which creates room for further rate cut.

Average inflation for the first two months of the fiscal year is 10.4%, a substantial drop from 27.8% in the same period of FY24.

Moreover, the Pakistani rupee has been stable hovering around PKR 278/USD for several months due to reduction in current account deficit, which came at $169 million in July 2024 against $741 million in the same month last year.

In its last announcement on July 30, SBP slashed the policy rate by 100 basis points to 19.5 percent. The committee observed the inflationary impact of the budgetary measures was broadly in line with expectations. Moreover, the external account has continued to improve, as reflected by the build-up in SBP’s FX reserves despite substantial repayments of debt and other obligations.

MPC aims to bring inflation towards the medium-term target of 5 – 7 percent.

It must be noted that the full impact of recent budgetary measures on inflation will take some time to fully reflect in domestic prices.

The MPC expects average inflation to remain in the range of 11.5 – 13.5 percent in FY25, down significantly from 23.4 percent in FY24. This is primarily on account of the high base effect and softening food inflation.