Central bank likely to cut rates by 150bps on Sept 12: analysts, polls

KARACHI: The State Bank of Pakistan is expected to cut its key interest rate by 150 basis points (bps) next week due to a significant decline in inflation, according to the majority of analysts and polls.

The SBP will unveil its monetary policy decision on September 12 (Thursday).“We anticipate a 150bps cut, bringing the policy rate down to 18 per cent – a level last seen in February 2023, when it had dropped to 17 per cent,” said Arif Habib Limited (AHL) in a note on Thursday.

“This would mark the third consecutive rate cut since the commencement of the interest rate reversal cycle in June 2024,” it added.The recent improvements in macroeconomic indicators, especially falling inflation is the main factor that supports larger rate expectations at the upcoming monetary policy meeting. In August, inflation fell to a single digit of 9.6 per cent, resulting in a real interest rate of 1,000bps, which creates room for further rate cuts. Both headline and core inflation rates in Pakistan have als9 decreased.

Further, the current account deficit reduced to $162 million in July from $741 million a year earlier. The SBP’s reserves have also seen a substantial increase. The reserves have risen to $9.4 billion, up from $7.6 billion a year earlier. “This boost in reserves allows the central bank to lower interest rates with reduced risk of destabilizing the currency or draining reserves,” said the report.

The Large Scale Manufacturing Index (LSMI) has shown a slight improvement in its performance. For FY24, the LSMI reported a 0.94 per cent year-on-year increase in production, with positive growth observed in ten sectors, including food, coke, and petroleum products, wearing apparel, and pharmaceuticals.

“Pakistan finalized a staff-level agreement with IMF in Jul’24 which is anticipated to receive executive board approval soon,” it said.“The IMF highlights a commitment to fostering disinflation, which supports our expectation of continued monetary easing. Hence, a reduction would be consistent with the IMF’s policy stance and would further support the ongoing efforts to stabilize the economy and foster growth,” it added.

A poll conducted by AHL showed that the majority, 57.1 per cent, expect a reduction of 150bps in rates. Meanwhile, 21.4 per cent foresee a 200bps cut, 10.7 per cent anticipate a 100bps reduction, and 3.6 per cent predict a cut of 250bps.

Similarly, in a poll conducted by Topline Securities, in absolute terms, 59 per cent of the participants are expecting 150bps, 19 per cent 200bps, and 5.0 per cent more than 200 bps cut. While, 13 per cent are expecting 100 bps cut and 2.0 per cent are expecting 50bps cut.“We are also of the similar view that the SBP will announce a rate cut to the extent of 150bps compared to a cut of 100bps in the last monetary policy meeting,” said Topline Securities.