SBP likely to cut policy rate by 200bps this month, say experts

KARACHI: The State Bank of Pakistan is expected to cut its key interest rate further at its upcoming policy meeting scheduled this month as inflation continues to drop, say experts.

Most analysts and surveys conducted by brokerage houses expect the SBP’s Monetary Policy Committee (MPC) to cut the policy rate by 200 basis points (bps) when it meets on December 16. The SBP cut its key interest rate by 250bps to 15 per cent in November. The SBP has reduced interest rates four times in a row since June, totalling 700bps.

The consumer price index (CPI) for November clocked in at 4.9 per cent -- well below the general market consensus.“This reading places inflation even below the SBP’s target range of 5-7 per cent. With CPI inflation expected to remain in single digits for the coming months, the current policy rate of 15 per cent provides significant room for rate cuts in upcoming monetary policy meetings,” said Chase Securities in a note on Tuesday.

According to a poll conducted by Topline Securities, 71 per cent of the participants expect that the central bank will announce a minimum rate cut of 200bps.“Out of the 71 per cent, 63 per cent expect the interest rate to be cut by 200bps, 30 per cent expect a cut of 250bps, and 7.0 per cent anticipate a cut of more than 250bps.

The participants are expecting a rate cut due to high real rates, which are high as the monthly inflation reading for November has touched a 78-month low of 4.9 per cent, said Topline Securities in a note.The significant fall in year-on-year inflation in the last few months is on the back of faster food disinflation and negative electricity price adjustments.

“We also hold the view that the SBP will announce a rate cut of 200 bps, taking the total cut to 900bps,” it said.“Post this rate cut of 200bps, real interest rates will remain at 810bps, still higher than Pakistan’s historic average of 200-300 bps,” it added.

However, based on average inflation of 7-8 per cent for FY25 and 8.5-9.5 per cent for FY26, real rates after this 200bps rate cut (policy rate 13 per cent) would be 400-550bps, it added. “Based on the above, we maintain our interest rate target of 11-12 per cent for December 2025.”

“The sufficient real rates required to accommodate any external or budgetary shock: In order to absorb any mini-budget impact and external shock, we believe the central bank will continue to keep a positive real rate in the range of 300-400 bps in medium-term over forward-looking inflation,” it said. According to the report, led by falling inflation expectations, the six-month Karachi interbank offered rate and Treasury bills rate are down 74-81bps since last monetary policy meeting on November 04, and currently hovering at 12.59 per cent and 12.16 per cent, respectively.