KARACHI, October 23 2024: – As the upcoming monetary policy meeting on November 4, 2024, approaches, analysts at Arif Habib Limited (AHL) anticipate a substantial 200 basis points (bps) cut in the policy rate, potentially lowering it to 15.5%. This level would be reminiscent of November 2022 when the rate stood at 16.0%. If this reduction materializes, it would accumulate to a remarkable total of 650bps in cuts, mirroring historic reductions seen between July 2001 and November 2002.
A Shift in Monetary Policy
This anticipated rate cut marks the fourth consecutive reduction since the interest rate reversal initiated in June 2024, signalling a significant shift in the State Bank of Pakistan’s (SBP) monetary policy stance in light of improving macroeconomic conditions.
Supporting Macroeconomic Indicators
Several macroeconomic indicators substantiate the call for a 200bps rate cut:
- Inflation Decline: Inflation has dramatically decreased to 6.9% in September 2024, a 44-month low, and is expected to ease further to 6.3% in October. This decline is critical as it alleviates pressure on consumers and businesses, allowing for a more favourable economic environment.
- Current Account Deficit (CAD) Improvements: For the first quarter of FY25, the CAD plummeted to USD 98 million, a staggering 92% year-on-year reduction from the USD 1,241 million deficit recorded in the same quarter last year. This improvement reflects stronger economic fundamentals and better fiscal management.
- Increased Remittances: A 38.8% year-on-year surge in remittances during the first quarter of FY25 has bolstered the overall current account position, providing further stability to the economy.
- Industrial Support: With a reported 0.9% year-on-year decline in Large Scale Manufacturing (LSM) growth for the first two months of FY25, a rate cut would significantly lower production costs for industries, fostering a revival in demand and production activity.
- Strengthening Reserves: SBP reserves have increased to USD 11.0 billion from USD 7.7 billion a year ago, largely due to the IMF’s first tranche of USD 1.0 billion from the 37-month Extended Fund Facility received in Q1 FY25. This increase in reserves not only enhances the SBP’s capacity to reduce interest rates but also mitigates risks associated with currency destabilization.
- Commitment to Disinflation: The IMF has emphasized the authorities’ commitment to promoting disinflation, with an estimated rate of 9.5% for FY25. This aligns with expectations of ongoing monetary easing, making a rate reduction consistent with the IMF’s policy framework.
Trends in Money Market Yields
Since the last monetary policy announcement in September 2024, yields on short-term government securities have decreased markedly:
- In the primary market, yields for 3-month, 6-month, and 12-month instruments have fallen by 218bps, 340bps, and 326bps, respectively. Yields for 3-year and 5-year tenors dropped by 375bps and 251bps, while the 10-year yield fell by 127bps.
- Similarly, in the secondary market, yields for various tenors showed significant declines, indicating market expectations of further monetary easing.
AHL Survey Insights
To gauge market expectations regarding the forthcoming monetary policy meeting, AHL conducted a comprehensive survey among various sectors, including financial services and manufacturing. The results indicate overwhelming anticipation for a rate cut:
- 100% of respondents expect the SBP to lower the policy rate.
- Among those forecasting a cut, 61.1% predict a reduction of 200bps.
Conclusion
In summary, the combination of declining inflation, improving current account deficits, increased remittances, and rising reserves paints an optimistic picture for Pakistan’s economy. The anticipated 200bps rate cut not only aligns with macroeconomic improvements but also represents a pivotal step in the SBP’s strategy to stimulate growth while maintaining stability. As the market prepares for the upcoming monetary policy decision, stakeholders remain hopeful for a favourable outcome that could pave the way for sustained economic recovery.
