(CTN News) – Given the signs of declining inflation, it is largely expected that the State Bank of Pakistan will lower its benchmark interest rate at its meeting next week for the second time in a row.
Most analysts anticipate that the central bank will lower its policy rate by 100–150 basis points (bps) on Monday, July 29.
The markets are watching this meeting closely to see if the SBP will stick with its current rate or continue its recent trend of monetary easing. This is especially important in view of the government’s recently released fiscal year 2025 budget and Pakistan’s recent commitment to a new $7 billion, 37-month loan from the International Monetary Fund.
After keeping its benchmark interest rate at a record-high 22 percent for almost a year, the SBP lowered it by 150 basis points to 20.5 percent last month.
The SBP has reduced its rates as inflation pressures lessen.
The CEO of Topline Securities, Muhammad Sohail, states that “a 100 basis point reduction is probable in harmony with the decline in inflation.”
Core and headline inflation have both seen notable improvement. For example, the average headline inflation in FY2024 dropped to 23.4% from 29.2% the year before. It is projected that inflation will drop even more in July, to about 10.5 percent, meaning that the actual interest rate will be 1,000 basis points.
Compared to the historical 10-year average of -44 basis points, this rate is noticeably higher.
Arif Habib Limited (AHL) analyst, “We anticipate a 100 basis points reduction, which could result in the policy rate falling to 19.5%, a level that has not been observed since March 2023,” he wrote in a note.
AHL conducted a survey and found that 55.7 percent of respondents thought the SBP would lower the policy rate and 44.3% thought it would stay the same.
The current account deficit dropped dramatically by 79% in FY2024 to $681 million, the lowest amount in 13 years.
Rupee’s been stabilized by this inflation trend.
The foreign exchange reserves of the State Bank of Pakistan have also seen a significant rise. Before FY24 ended, reserves were only $4.4 billion, but by the end of the year, they had grown to $9.4 billion.
It said that the country’s financial stability is enhanced by this increase in reserves, which also provides more room for monetary policy changes.
The production growth rate in the industrial output or large-scale manufacturing sector increased by 7.3% in May, marking the fastest pace of growth in the previous 23 months.
The staff-level agreement from the IMF further emphasizes a commitment to fostering disinflation, which is intended to protect real incomes, especially for the most vulnerable groups in society.
This emphasis aligns with our expectation that the policy will continue to be implemented. It was noted that this kind of cut would be consistent with the IMF’s policy position and would give further impetus to ongoing efforts to stabilize the economy and foster development.
Both international rating agencies and regional economists and experts expect deflation to continue, requiring further rate cuts from the SBP.”We anticipate that policymakers will decrease their primary rate during their subsequent meeting.”
A “substantially positive” real interest rate has been maintained by policymakers, according to BMI, a Fitch Solutions Company, in its most recent report on Pakistan. This is important for keeping inflation within the medium-term target range of 5-7 percent.
“The policy rate will, however, be adjusted in line with inflation.
Due to the fact that an exceptionally high real interest rate can depress investments, which inhibits already moderate economic growth.”
“We anticipate that the SBP’s policymakers will continue to relax policy in the long term, with a 14% reduction by the end of 2025.” As inflation declines, we expect policymakers to gradually lower their key policy rate in order to lower real rates, which we predict will rise sharply in 2024.
“Risks are disproportionately associated with inflation that exceeds expectations, which would necessitate policymakers to reduce the pace of their easing cycle,” it said.
“The impending release of FY25 budgetary measures and adjustments in energy tariffs has the potential to significantly increase short-term inflation and discourage policymakers from reducing rates,” it said.
Even with the typically poor economic indicators, some analysts are reluctant to project the future trajectory of rate decrease.” We anticipate that the SBP will adopt a wait-and-see approach in light of the deterioration in the trade balance and current account balance, the higher inflation reading, and the improved LSM reading post-MPC.”
According to Awais Ashraf, director of research at AKD Securities Limited, “the SBP will also evaluate inflationary pressures that arise from budgetary measures and supply disruptions caused by the ongoing heat wave.”
SOURCE: ITN
SEE ALSO:
Heavy Rain Continues Across Pakistan, with more Showers Anticipated.
Move Forward Pushes Bill to Legalize Adult Entertainment Industry in Thailand
President Biden should leave the White House, according to Republicans
Salman Ahmad is known for his significant contributions to esteemed publications like the Times of India and the Express Tribune. Salman has carved a niche as a freelance journalist, combining thorough research with engaging reporting.
