All eyes are on the State Bank of Pakistan (SBP) as it prepares for its monetary policy review on September 12. There is widespread expectation that the central bank will announce another cut in the key interest rate.
Capital market firm Arif Habib Limited has predicted a 150 basis points (bps) reduction in the policy rate, marking what could be the third consecutive cut since the central bank began reversing interest rate hikes in June this year.
The expected cut comes as Pakistan’s inflation rate dropped to 9.6% last month, resulting in a real interest rate of 1,000 bps. This substantial gap between inflation and the current policy rate creates room for further monetary easing. Both headline and core inflation rates have been on a downward trend, and for the first two months of FY25, the average inflation rate stood at 10.4%, significantly lower than the 27.8% recorded during the same period last year.
In addition to lower inflation, Pakistan’s foreign exchange reserves have also seen improvement. Over the past year, the central bank’s reserves have grown from $7.6 billion to $9.4 billion, giving the SBP more flexibility to lower interest rates without risking a depletion of reserves.
Pakistan recently reached a staff-level agreement with the International Monetary Fund (IMF), which was finalized in July and is expected to receive approval from the IMF’s executive board soon. The IMF’s focus on promoting disinflation aligns with Arif Habib Limited’s expectations of continued monetary easing, which could help stabilize Pakistan’s economy and encourage growth.
This combination of lower inflation, improved reserves, and international support sets the stage for the SBP to continue its policy of monetary easing, which many hope will lead to economic recovery and growth.
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