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2% Rate Cut Expected by SBP – MPC Meeting on Nov 4, 2024

2% rate cut expected by SBP

Karachi –A major policy rate reversal is likely with a 2% rate cut expected by SBP, as the State Bank of Pakistan prepares for its upcoming Monetary Policy Committee meeting on November 4, 2024. Analysts and market watchers expect the apex bank to reduce interest rates by at least 200 bps based on continuously easing inflationary pressures.

In a recent poll conducted by Topline Securities, 85% of the respondents expected at least a 200 bps rate cut by SBP, while several others expected deeper cuts. It covered major financial players who gave their feedback regarding their expectations of the policy rate and inflation for FY 2024-2025.

2% Rate Cut Expected by SBP to Boost Economic Activity
  • SBP’s Aggressive Rate Cut: Pakistan’s central bank is expected to announce a significant interest rate cut to combat cooling inflation, with analysts predicting a minimum 200 bps reduction
  • Declining Inflation: A marked drop in inflation, fueled by lower food prices and electricity cost adjustments, gives the State Bank of Pakistan more room for easing monetary policy.
  • Economic Boost: The anticipated rate cut aims to boost Pakistan’s economy by reducing borrowing costs, fostering investment, and supporting economic recovery amidst stabilizing inflation rates.

What Really Drives Rate Cut Expectations?

A steep rate cut forecast is expected with a noticeable drop in inflation. In September 2024, Pakistan’s inflation rate slipped to a single-digit 6.9%, the lowest in recent years, and is expected to remain within 6.5-7.0% for October. Decreasing inflation helped in reduction of food prices and adjudged changes in the cost of electricity, particularly under the FCA mechanism.

Such developments have once again eased the inflation expectation downward providing room to SBP to make money expansionary policy.

The next 200-bps cut, equal to the previous one in September 2024, would take the cumulative rate cut in this easing cycle to 650 bps and also mark the fourth such back-to-back rate cut in recent months.

Real Interest Rates and Stock Market Response as 2% Rate Cut Expected by SBP

In case, SBP decides on a speculated 200-bps cut, the real interest rates of Pakistan would remain firmly positive at +860 bps, much higher than the historical average of 200-300 bps. In the medium term, the SBP can retain a positive real interest rate of 300-400 bps as inflation expectations stabilize.

This monetary easing trajectory has already impacted the market rates. The six-month KIBOR and Treasury bills rates are down 324-359 bps apiece since the last monetary policy announcement, with KIBOR coming at 14.43% and T-bills at 13.8%. These movements reflect a broader market expectation for continued rate cuts.

Overview of Survey Findings and Future Outlook

rate cut expectations for growth

The public opinion regarding the interest rate changes was also reflected in a survey by Topline Securities. Among the participants, who are expecting the rate to be cut, 63% expect a 200bps reduction, 30% expect a 250bps cut, and 8% expect an even larger cut.

These contributions look ahead to June 2025, when most participants in this survey expect the policy rate to settle between 13-14%, while the average inflation for fiscal year 2025 is projected at 7-8%. This has been a big change in sentiment from previous questionnaires, as 87% now expect a policy rate of between 10-14% by mid-2025, against just 18% who saw that range previously. Only 9% of the contributors remain who see rates staying in the higher 14-18% bracket, while a few even expect rates below 10%.

declining sbp interest rate nov 2024

Inflation expectations have also corrected significantly, with 81% of survey respondents expecting average inflation to remain below 10% in fiscal year 2025. Of this, 53% expect it to lie between 8-10%; 26% believe between 6-8%, and a small minority expect it below 6%.

Rate Cut Implication on the Economy of Pakistan

The continued easing policy of the SBP can give the much-needed stimulus for economic progress once the borrowing costs are shaved off potentially promoting higher investment in the economy of Pakistan. However, the central bank has to define a balance between the pace of cuts and cautiousness in maintaining positive real interest rates as an essential ingredient for keeping inflation on the leash for a longer period. Although inflation is moderating and growth is stabilizing, the proactive stance for interest rates that SBP has adopted may create an enabling environment for businesses to get the financial squeeze off consumers and revive key sectors of the economy.

The fall in the Karachi Interbank Offer Rate Nov 2024 will play a crucial role in determining loan and deposit rates across Pakistan’s banking sector in the coming month. Analysts hope for a robust boost in business activity with the decline in SBP interest rate Nov 2024.

In short, the monetary policy in Pakistan has reached the point, where further rate reductions could realistically help consolidate the gains against inflation, besides creating a favorable climate for economic recovery. The upcoming decisions of the central bank will be pivotal in shaping the economic growth of the country in the coming months.

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