SBP Considers Breaking Annual status quo, Mulling 1% Policy Rate Cut
Majority of analysts predict central bank is highly likely to revise its hawkish monetary policy stance because of cooling inflation
Tariq Ali 
Islamabad: A Reuters survey indicates that the State Bank of Pakistan (SBP) is likely to decrease its main interest rate by 1% (or 100 basis points) next week.
Should this decision materialize, it would mark the initial indication of a shift from the prevailing hawkish monetary policy stance, which has maintained the rate at a record high of 22% over seven consecutive Monetary Policy Committee (MPC) meetings since July 2023.
The SBP is set to convene on Monday, shortly after the release of Pakistan's lowest inflation rate in 30 months, recorded at 11.8% in May.
This meeting precedes the announcement of the annual budget for the fiscal year 2024-25. Notably, the inflation rate was below most market and official expectations, with the country grappling with inflation exceeding 20% since May 2022.
According to the Reuters survey involving 16 analysts, a majority predict a 1% reduction in the interest rate. Specifically, ten analysts anticipate a 1% cut, one forecasts a 1.5% cut, and four predict a 2% cut. One analyst anticipates no change in the rate.
Finance Minister Muhammad Aurangzeb, speaking at a business conference in China, expressed anticipation of rate decreases amid declining inflation.
Over the past two years, commercial activity in the country has been sluggish due to stringent reforms implemented under an IMF deal aimed at stabilizing the economy.
The GDP growth, expected to reach 2% by the end of the current financial year, was negative in the previous year. The government aims for 3.5% growth this year, expecting an uptick in economic activity.
Formal engagement with the International Monetary Fund (IMF) for a new longer-term bailout is anticipated this summer after the completion of a short-term program earlier this year, which helped avoid default.
The IMF previously emphasized the importance of maintaining a tight monetary policy to control inflation, which remained above 20% since May 2022 and peaked last year at 38%.
Inflation has since decelerated, registering below 20% in April and 11.8% in May.
Uzair Younus, an economic analyst, noted, "Given the sustained decline in inflation and the SBP's prudent approach in not prematurely cutting rates, there is now room for a cut without risking commitments with the IMF."
However, Fawad Basir, Head of Research at KTrade, cautioned that tax reforms under consideration in the budget could have broader economic ramifications beyond inflation. He suggested that once the impact of such decisions becomes evident in high-frequency data sets and successful negotiations with the IMF are concluded, the SBP may be well-positioned to adopt a more accommodative stance, possibly aligning with the US Federal Reserve's strategy.
