Analysts expect 100bps rate cut as inflation eases

KARACHI: Pakistan’s central bank is expected to lower its key interest rate by at least 1 percentage point on Monday, analysts said, in its sixth straight cut as it attempts to revive economic and business sentiment as inflation slows sharply.

The central bank has slashed rates by 900 basis points (bps) from an all-time high of 22 per cent in June 2024, in one of the most aggressive moves among emerging markets’ central banks and topping the 625bps in rate cuts it did in 2020 during the Covid-19 pandemic.

The median expectation of the fifteen analysts surveyed by Reuters is for the State Bank of Pakistan to lower rates by 100 bps. Only one analyst expects the bank to hold rates at 13 per cent.

Of the 14 analysts who expect a rate cut, 11 expect a 100bps reduction, one expects the central bank to lower rates by 150bps and two expect it to chop rates by 200bps.

Ahmad Mobeen, senior economist at S&P Global Market Intelligence, said his forecast for a 150bps cut was “driven by the low December inflation figure and a stable exchange rate supported by a healthier current account”.

The South Asian country is navigating a challenging economic recovery path and has been buttressed by a $7 billion facility from the International Monetary Fund (IMF) in September.

Pakistan’s consumer inflation rate slowed to an over six-and-a-half-year low of 4.1 per cent in December, largely due to a high year-ago base. That was below the government’s forecast and significantly lower than a multi-decade high of around 40 per cent in May 2023.

The central bank, in its policy statement in December, noted that it expected inflation to average “substantially below” its earlier forecast range of 11.5 per cent to 13.5 per cent this year.

However, inflation may pick up in May as the base year effect wears off, said Saad Hanif, research analyst at Ismail Iqbal Securities.

That is “in addition to other risks to inflation including increases in energy tariffs, new taxation measures, and a potential hike in the levy on petroleum prices,” said Hanif, who expects a 100bps cut.