Monetary Policy Meeting – Preview; Most participants expect 100bps cut

Staff Report : State Bank of Pakistan (SBP) is scheduled to conduct its Monetary Policy Meeting (MPC) on Jul 29, 2024.

In a poll conducted by Topline Securities (details on next slide), 75% of the market participants are expecting central bank to announce a rate cut, of which 60% are expecting a rate cut of 100bps.

We are also of the view that, SBP can lower the rate by 100bps to 19.5% in its upcoming meeting due to receding inflation. We estimate inflation to clock in at 11% in Jul 2024.Hot, humid weather expected in most parts of country

Sufficient Real rate to absorb any external shock or lagged impact of budgetary measures:  Real rates based on Jun 2024 inflation of 12.6% is around 790bps (950bps based on Jul 2024 inflation), higher than historic average of 200-300bps.

With the rate cut of 100bps, the real rate based on Jul 2024 inflation expectations of 11%, would be around 850bps, providing enough room to central bank to absorb any external shock or lagged impact of budgetary measures.

6M KIBOR and 6 Months T-Bills are down 83-84 bps from last MPC meeting: Led by falling inflation expectations, the 6M KIBOR and Treasury bills rate are down 83-84bps since last monetary policy meeting on Jun 10, 2024 and currently hovering at 19.84% and 19.52%, respectively. This suggest, market participants are also expecting rate cut in upcoming meeting.

Key Takeaways on further rate cut in last analyst briefing session of SBP: In last briefing, SBP mentioned that, room for further cut in interest rate will be dependent on post budgetary and IMF measures assessment.

If policy rate is reduced by SBP, this would be second consecutive cut as in last meeting SBP lowered policy rate by 150bps after 4 years since Jun 26, 2020.

We expect policy rate to decline by 450-550bps by Jun 2025 to 15-16% with real interest rate assumption of 300-400bps as we expect inflation to average 13-13.5% in FY25.

Participants expecting more rate cuts and are less aggressive on currency by Dec

Topline Research conducted a poll of key market participants on expectations over policy rate by Dec 2024, and PKR depreciation for FY25.

According to the results of the survey, 75% of the participants are of the view that, SBP will announce a rate cut. While, 25% believe, SBP will maintain status quo.