The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced its first policy rate cut in four years on Monday, reducing the rate by 150 basis points to 20.5%. This move, coming just ahead of the budget announcement, was anticipated by market analysts who expected a reduction between 100 and 200 basis points, as reported by Business Recorder.
The SBP’s decision to ease monetary policy follows a decrease in CPI inflation to 11.8% in May, down from a historic high of 38% the previous year. Additionally, central banks worldwide, including the Bank of Canada and the Bank of England, have begun cutting rates.
Sana Tawfik, Head of Research at Arif Habib Limited (AHL), expressed that the rate cut was timely and positive for sectors such as cement, power, textile, chemical, and auto. Mustafa Pasha, chief investment officer at Lakson Investments, noted that while the immediate market impact might be muted, the SBP is expected to pursue aggressive cuts, potentially lowering the policy rate to 16-17% by year-end.
Pasha highlighted that the central bank is balancing a stable currency, positive current account, and lower inflation. He predicted a total rate cut of 4-5% by the end of the year. Despite ongoing talks with the IMF for a new bailout, market experts believe the rate cut aligns with IMF expectations, as the rate remains high.
Pasha suggested the IMF would focus more on budgetary measures than the rate cut. Tawfik added that even if upcoming budget measures are inflationary, a rate hike is unlikely, as the current policy rate can support inflation up to 12-14%.
Economist Asad Ali Shah praised the decision, advocating for further cuts as inflation is projected to fall below single digits. Khurram Schehzad, CEO of Alpha Beta Core, described the rate cut as a bold move, highlighting its potential to reduce domestic debt servicing and emphasizing the importance of fiscal reforms.
Overall, the SBP’s rate cut reflects a strategic move to balance inflation control and economic growth, with analysts expecting continued monetary easing in the near future.
