Pakistan Economy – Monetary Policy Meeting – Preview; Most participants expect 150bps cut

ISLAMABAD: State Bank of Pakistan (SBP) is scheduled to conduct its Monetary Policy Meeting (MPC) on Sep 12, 2024.

In a poll conducted by Topline Securities (details on next slide), 98% of the participants believe that central bank will announce a rate cut compared 75% of the participants in last poll.DGPC Removed over Controversial Policy Framework

Out of 98%, 85% are expecting more than 150bps cut while 15% are expecting cut between 50-100bps. In absolute terms, 59% of the rate cut participants are expecting 150bps, 19% 200bps, and 5% more than 200bps cut. While, 13% are expecting 100bps cut and 2% are expecting 50bps cut.

We believe, larger rate cut expectations in upcoming monetary policy meetings are driven by single digit inflation reading of Aug 2024 at 9.6%, which is expected to continue in Sep 2024 as well.

We are also of the similar view that, SBP will announce rate cut to the extent of 150bps compared to cut of 100bps in last monetary policy meeting.

Post this rate cut of 150bps, real interest rates will remain at +840bps, still higher than Pakistan’s historic average of 200-300bps.

Sufficient Real rates required to accommodate any external or budgetary shock: In order to absorb any external and budgetary shock, we believe, Central bank will continue to keep positive real rate in range of 300-400bps in medium terms over forward looking inflation.

6M KIBOR and 6 Months T-Bills are down 156-163 bps from last MPC meeting: Led by falling inflation expectations, the 6M KIBOR and Treasury bills rate are down 156-163bps since last monetary policy meeting on Jul 29, 2024 and currently hovering at 17.82% and 17.49%, respectively. This suggest, market participants are also expecting similar rate cut in upcoming meeting.

If policy rate is reduced by SBP, this would be third consecutive cut as SBP lowered policy rate by 100bps on Jul 29, 2024 and by 150bps on Jun 26, 2020.

We expect policy rate to come down to 14-15% with real interest rate assumption of 300-400bps as we expect inflation to average 10-11% in FY25.

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

According to the results of the survey, 98% of the participants are of the view that, SBP will announce a rate cut. While, only 2% believe, SBP will maintain status quo. Expectations of rate cut are significantly aggressive compared to last poll wherein 75% of the participants were expecting a rate cut.

Out of rate cut respondents, 85% are expecting more than 150bps cut while 15% are expecting cut between 50-100bps.

In absolute terms, 59% of the rate cut participants are expecting 150bps, 19% 200bps, and 5% more than 200bps cut. While, 13% are expecting 100bps cut and 2% are expecting 50bps cut.

In second question related to interest rate expectations by Jun 2025, 67% of the participants are of the view that, interest rate will be in range of 14-16%, while 15% believe that interest will be in range of 16-18% and 18% believe that interest rate will be less than 14%.

On question with respect to inflation expectations, 39% are of the view that, inflation would be in range of 10-12%, 33% believe that inflation will average between 8-10%, while 22% believe inflation to average over 12% and 6% believe inflation to be below 8%.