The Monetary Policy Committee of the State Bank of Pakistan is scheduled to meet on June 10, 2024, to decide on the final monetary policy for FY2023-24, and there is mounting expectation for a rate cut.
A survey by Arif Habib Limited (AHL) estimates a reduction of 200bps in the policy rate, potentially lowering it to 20 percent, a level last seen in March-April 2023. This forecast is underpinned by several favorable economic indicators stated in the AHL report, suggesting a conducive environment for the initiation of a reversal in monetary stance.
One of the primary factors supporting the expectation of a rate cut is the downward trajectory of Pakistan’s inflation. Both headline and core inflation figures have shown significant improvement. The average headline inflation for the 10MFY24 has decreased to 25.97 percent, down from 28.23 percent during the corresponding period last year. For May 24, inflation is anticipated to further decline to -13 percent, which would result in a real interest rate of 900bps-substantially higher than the historic 10-year average of negative 44bps.
On the external front, the current account deficit has shown remarkable improvement during 10MFY24, narrowing by 95 percent to $202 million. This significant reduction has contributed to the stability of the PKR against the US dollar.
In its recent country report, the IMF has acknowledged these positive economic developments but has emphasized the importance of maintaining a tight monetary policy to ensure continued stability. However, the IMF also suggested that the stance could be reassessed if Pakistan’s inflation continues to decrease and improvements in the foreign exchange market persist.
Even with a potential rate cut of 200bps, Pakistan would still align with the IMF’s stance on maintaining a relatively tight monetary policy. Given the improvements in inflation and the external account, it is plausible to foresee an easing in the monetary policy framework. The anticipated rate cut would not only support economic growth but also align with the evolving economic conditions.
Since the last monetary policy announcement in April 2024, a decline in yields for government securities in both primary and secondary markets has been observed.
In the primary market, yields across various tenors have decreased, with reductions of 0.6 percent in 3-month yields, 0.38 percent in 6-month yields, and 0.80 percent in 12-month yields.
Similarly, in the secondary market, yields have declined, with 3-month yields decreasing by 1.15 percent, 6-month yields by 0.40 percent, and 12-month yields by 0.88 percent. Moreover, PIB yields have also fallen, with the 3-year yield decreasing by 0.02 percent, the 5-year yield by 0.07 percent, and the 10-year yield by 0.04 percent.
This decline in yields suggests a growing market sentiment anticipating a potential rate cut.
AHL Poll
In order to find out what the market is expecting in the upcoming monetary policy scheduled in the current month (Jun 24), AHL conducted a survey (poll) taking feedback from various sectors. The respondents belong to sectors such as:
- Financial services: Banks, AMCs, Insurance, and DFIS
- Non-Financial Services/Manufacturing: E&Ps, Cement, Fertilizers, Steel, Textiles, and Pharmaceuticals.
Market sentiment evident from the poll regarding the upcoming MPS also suggests expectations of a rate cut. Here are the results of the AHL survey (poll):
- AHL poll suggests that 73 percent of respondents expect the SBP to reduce the policy rate, while 27 percent anticipate the policy rate to remain unchanged.
- Among those expecting a cut, 31 percent foresee a reduction of 200bps, 24 percent expect a reduction of 100bps and 11 percent expect a cut of less than 100bps in the June 24 policy.
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