The upcoming monetary policy meeting of the State Bank of Pakistan (SBP), scheduled for June 10, is drawing significant attention from various stakeholders. Unlike previous sessions, this meeting will occur without the benefit of input from recent budgetary measures or ongoing negotiations with the International Monetary Fund (IMF) for a new loan, adding a layer of uncertainty to the decision-making process.
Economic relief and inflation concerns
The government’s intent to provide relief to the general populace is expected to introduce inflationary pressures. Consequently, experts predict that the SBP will adopt a cautious approach despite the substantial gap between the headline consumer inflation rate of 11.8 per cent and the current policy rate of 22pc.
Market anticipation and interest rate predictions
A survey by Topline Securities revealed that 90pc of participants anticipate a rate cut, although the magnitude of the cut remains a topic of debate. Estimates range from a reduction of 100 to 300 basis points. This sentiment has already influenced the secondary market, where the Karachi Interbank Offered Rate (KIBOR) and yields on government securities have seen declines.
The return on three-month government papers fell by 19 basis points to 20.18pc, marking a 142 basis point drop over the past month. Similarly, yields on six-month and one-year papers have decreased, reflecting market expectations of a rate cut.
Challenges and expert opinions
Financial analysts highlight the SBP’s predicament, as it lacks guidance from budgetary measures and IMF developments. Despite a real interest rate of 10.2pc, the central bank may opt for a conservative approach to maintain manageable interest rate policies.
Mohammad Sohail, CEO of Topline Securities, noted that the SBP had previously indicated it would consider budgetary and IMF developments in its decisions. However, with the budget announcement slated for June 12, the SBP will have to proceed without this context. Sohail forecasts a significant policy rate reduction of 600-700 basis points by June 2025, settling around 15-16pc, assuming inflation averages 13-13.5pc in the next fiscal year.
Tahir Abbas, head of research at Arif Habib Ltd, expects the SBP to initiate monetary easing with a 200 basis point rate cut.
Market sentiment and future expectations
A Topline Research poll of key market participants reveals growing optimism for a rate cut. While 88pc of respondents expect a rate cut this time, only 49pc anticipated it before the last Monetary Policy Committee meeting. Of these, 34pc foresee a reduction of 200-300 basis points, a significant increase from previous surveys.
Furthermore, nearly half of the investors now expect the policy rate to fall to 16-18pc by December, driven by a sharper-than-expected decline in May’s inflation reading. Regarding currency depreciation, 41pc anticipate a 2-6pc annual decline in the rupee’s value, while 38pc predict a 6-8pc depreciation.
On the IMF front, 62pc of participants believe a staff-level agreement with Pakistan will be announced in July, while 30pc expect it after August.