Monetary Policy Expectations: Interest Rate Cuts Nearing an End for Pakistan?

Pakistan’s economic landscape has been undergoing significant changes, with a series of interest rate cuts initiated by the State Bank of Pakistan (SBP) since mid-2024, now taking monetary policy expectations of rate cuts to an end. However, with inflation stabilizing and external economic factors shifting, experts suggest that the monetary easing cycle may be approaching its final stages.

پاکستان میں شرح سود میں کمی کا سلسلہ ممکنہ طور پر اپنے آخری مراحل میں داخل ہو رہا ہے کیونکہ مہنگائی میں نمایاں کمی دیکھنے میں آئی ہے۔ اسٹیٹ بینک کی مانیٹری پالیسی کمیٹی 10 مارچ 2025 کو اگلا فیصلہ کرے گی، جس کے بارے میں ماہرین کی رائے منقسم ہے۔پالیسی ریٹ مارچ 2025 کی توقعات میں کچھ تجزیہ کار مزید 50-100 بیس پوائنٹس کی کمی کی توقع کر رہے ہیں، جبکہ کچھ کا خیال ہے کہ پالیسی ریٹ 12 فیصد پر برقرار رہ سکتا ہے۔ گزشتہ مہینوں میں مہنگائی کی شرح 2.4 فیصد تک گر چکی ہے، جو اکتوبر 2015 کے بعد سب سے کم ہے۔ تاہم، روپے کی قدر میں کمی اور درآمدات میں اضافے کے باعث اسٹیٹ بینک محتاط رویہ اپنا سکتا ہے۔ آئی ایم ایف کی آئندہ جائزہ میٹنگ بھی پالیسی فیصلے پر اثر انداز ہو سکتی ہے۔ ماہرین کا اندازہ ہے کہ جون 2025 تک شرح سود 10-12 فیصد کے درمیان مستحکم ہو جائے گی۔

Monetary Policy Expectations on Rate Cuts

The SBP is set to hold its next MPC meeting on March 10 2025, where the key policy rate will be reviewed once again. Recent surveys indicate a divided opinion among financial analysts regarding the next move. To know about the monetary policy expectations of the people AHL and TLS conducted the Interest Rate Survey for March 2025.

• A survey by Arif Habib Limited (AHL) revealed that 74% of respondents expect a rate cut, with the majority predicting a 100bps reduction. A smaller portion (21.1%) anticipates a 150bps cut, while 10.5% foresee a more moderate 50bps reduction. However, 26% believe the SBP will maintain the current policy rate at 12%.

• Topline Securities conducted a separate poll, showing that 62% of market participants expect a rate cut of at least 50bps, with 37% forecasting a 100bps cut, 20% a 50bps cut, and 5% an aggressive 150bps cut.

While the possibility of another rate cut remains strong, financial analysts believe the window for further easing is shrinking. The SBP has already lowered interest rates by 1000bps since June 2024, bringing the current policy rate down to 12%.

Factors Influencing the Interest Rate Decision

1.⁠ ⁠Inflation Trends and Market Stability in Pakistan

Pakistan’s inflation rate has declined sharply, reaching 2.4% in January 2025, the lowest level since October 2015. This drop is primarily attributed to:
• Lower prices for housing and utilities (1.5% vs. 3.4% in December 2024)
• Declining food and beverage costs (-3.1% vs. 0.3%)
• Slower increases in restaurant, hotel, and miscellaneous services prices

However, transportation costs have slightly rebounded (0.7% vs. -2.5%), signaling a potential shift in inflation trends. The SBP has also revised its FY25 inflation projection to 5-7%, indicating that inflationary pressures are expected to remain under control for now.

2.⁠ ⁠IMF Review and External Pressures

One of the key reasons why the SBP might adopt a cautious approach is the upcoming International Monetary Fund (IMF) review in early March. The IMF will assess new revenue targets and taxation measures, which could impact the inflation outlook for FY26. Higher taxes and increased government revenues could limit the SBP’s ability to further ease interest rates.

Additionally, higher import levels (averaging $5.2 billion in December and January) and a 1.6% depreciation of the Pakistani Rupee since November 2024 might influence the central bank’s decision to pause further rate cuts and assess the impact of previous reductions.

3.⁠ ⁠Market Indicators and Investor Sentiment

The Real Effective Exchange Rate (REER) reached 104.05 in January 2025, indicating that the PKR is overvalued compared to regional currencies. A stronger PKR might reduce inflationary pressures but could also lead to a more cautious monetary policy approach.

Additionally, 6-month KIBOR and Treasury Bill yields have risen by 21-24bps since the last MPC meeting, signaling that the market expects the rate cut cycle to slow down.

Outlook for 2025: Where Are Interest Rates Headed?

Experts predict that Pakistan’s interest rate could stabilize around 10-12% by June 2025, implying a potential reduction of up to 200bps in the next three MPC meetings. However, the aggressive rate-cutting trend appears to be tapering off.

With inflation expected to average between 6-8% in FY25 and rise to 8-9% in FY26, the SBP may adopt a more measured approach moving forward.

The upcoming March 10, 2025 MPC meeting will be a crucial indicator of the central bank’s next steps. Will the SBP continue its easing cycle, or will it shift toward monetary stability? Market participants remain watchful as Pakistan’s economic landscape continues to evolve.

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