KARACHI: The Karachi Interbank Offered Rate (Kibor) has started to recede, reflecting both the money market’s reaction to low inflation and anticipation of an interest rate cut in the next monetary policy review.

From Friday to Monday, Kibor dropped by 11 basis points (bps) for a one-year term, decreasing from 21.38 per cent to 21.27pc. This marked the most significant decline in the two days.

However, almost all tenors saw a drop in Kibor. The benchmark six-month Kibor decreased by 10bps to 21.59pc from 21.69pc. One-month Kibor, experienced a slight decline of 4bps, with the rate at 22.21pc on Monday compared to 22.25pc the previous Friday.

“The decline is not very significant to determine the real reason behind it. The money market anticipates that the interest rate could see a cut in the next monetary policy,” said S.S. Iqbal, a money market dealer, and a senior banker.

Recent fall in headline inflation suggests trend for the future

He mentioned that the recent fall in the main inflation is a sign of a future trend for inflation that may help reduce the interest rate.

However, he added that due to Ramazan, the food basket is expected to be costlier than in any other month, affecting the Consumer Price Index (CPI) for March.

The State Bank of Pakistan is scheduled to announce the monetary policy by the end of this month. Like the previous month, bankers are keenly watching the developments. The trade and industry are extremely cautious about the interest rate, which has increased the cost of production, enhanced inflation, and ultimately reduced the purchasing power of consumers. If consumption declines, economic growth will be affected.

The inflation for February was 23.1pc on a year-on-year basis, compared to 28.3pc in January, showing a steep fall of 5.2pc. This was the reason Kibor started receding, and the market received strong signals for a rate cut.

However, the new government requires time to settle down before initiating dialogue with the IMF for new loans and the release of the promised $1.2 billion, the third tranche of the $3bn Stand-By Arrangement.

Market experts are unclear about what additional conditions the IMF may propose for the ‘consolidation’ of the economy. Most experts are uncertain about the future trend of the CPI as well as the policy interest rate. Before the announcement of the previous monetary policy, speculations were high about the interest rate cut, but the inflation figures changed the scenario, and the interest rate remained unchanged.

Published in Dawn, March 5th, 2024