KARACHI: The sharp decline in inflation during August has opened the door for a potential interest rate cut of up to 200 basis points, researchers and analysts said after Monday’s release of the latest inflation figures.

The Consumer Price Index (CPI), which measures main inflation, dropped to 9.6pc in August from 11.1 per cent in July, creating an opportunity for the State Bank of Pakistan (SBP) to lower interest rates, in line with the demands of economic stakeholders.

“I expect a 150 bps reduction in the upcoming monetary policy, as real interest rates currently stand at 9.9pc,” said Samiullah Tariq, head of the research and development at Pakistan Kuwait Investment Company (Pvt) Limited.

During the previous monetary policy meeting held on July 29, the SBP reduced the interest rate by 100 bps to 19.5pc. However, many in the trade and industrial sectors expressed that this rate is still insufficient to stimulate the economy. These sectors are advocating for a reduction to around 14pc, citing the high interest rates as a major hindrance to private sector borrowing due to the prohibitive costs.

Experts anticipate up to 200bps reduction in next monetary policy meeting set for 12th

Mr Tariq noted that the secondary market yields on three-month treasury bills are around 18pc, which is 1.5 percentage points below the current policy rate. “This shows that the market is expecting a minimum rate cut of about 1.5 percentage points,” he said.

Mohammad Sohail, CEO of Topline Research, was even more optimistic, predicting a potential rate cut of up to 200 bps in the next monetary policy.

“Based on current inflationary trends, we expect a 100 to 200 bps cut in the policy rate,” he said, adding that the upcoming T-bills auction would provide further insights into market expectations for the scale of the cut.

However, Mr Sohail cautioned that maintaining this trend of low inflation would require a long-term agreement with the International Monetary Fund (IMF), strengthening foreign exchange reserves and maintaining fiscal discipline.

Pakistan is in discussions for a 37-month loan agreement with the IMF worth $7 billion, but the government has struggled to boost foreign exchange reserves ahead of finalising the deal.

Researchers also pointed out that geopolitical tensions, such as the conflict in Palestine, the war in Ukraine, and rising tensions with Iran, could lead to higher oil prices, potentially increasing inflationary pressures due to the higher cost of petroleum products.

Tahir Abbas, head of research at Arif Habib Limited, suggested that the SBP might take a cautious approach in the next monetary policy.

“We believe the SBP will cut interest rates by 150 bps in the upcoming monetary policy scheduled for Sept 12,” Mr Abbas said.

Despite the real interest rates now being significantly positive, “the SBP is expected to opt for a cautious approach towards monetary easing”, he added.

Independent economists warn that a cautious approach may not be sufficient to boost economic growth. The GDP growth is expected to remain between 2.5pc and 3.5pc, which is unlikely to create enough jobs for the hundreds of thousands of young Pakistanis currently seeking opportunities abroad.

Published in Dawn, September 3rd, 2024