The State Bank of Pakistan (SBP) reduced the policy rate in the second consecutive meeting by 100bps to 19.5% (cumulative easing of 250bps since June 2024). The SBP is broadly comfortable about the inflation trajectory, supported by recent outturns of CA balance, the IMF staff-level agreement for a new program and the FY25 Budget expected to be moderately inflationary. The decision is in line with our expectations, while some quarters of the market were expecting a 150bps cut.
Key highlights:
§ The SBP is projecting a GDP growth of 2.5-3.5% for FY25, which is backed majorly by an expected rebound in Industry and Services segments (which both grew only 1.2% YoY in FY24), while the Agriculture segment is expected to slow down (albeit, after posting strong growth of 6.3% YoY in FY24). The monetary easing is partly aimed at supporting growth, which will be driven majorly by a recovery in industrial activity (LSM jumped 7.3% YoY in May 2024 vs. 0.4% during July-April 2024 period).
§ It expects the headline inflation to average in the range of 11.5-13.5% during FY25, down from 23.4% during FY24. Headline CPI averaged 11.5% during the May-July 2024 period, backed by lower food inflation and a moderate impact of the increase in administered energy prices. Nonetheless, risks to inflation emanate from fiscal slippages (which will warrant tax increases amid an IMF program), and further increases in the administered energy prices.
§ The SBP is broadly comfortable about the external account: it expects imports to rise moderately and a revival of financial inflows (majorly driven by the successful IMF SLA, in our view). The present momentum in remittances is also expected to continue. It projects a modest C/A deficit of under 1% of GDP compared to 0.2% of GDP in FY24. Importantly, Pakistan was able to maintain its FX reserves around US$9bn during 4QFY24, despite hefty debt repayments and settlement of pending payments of US$2.2bn (majorly dividends of MNCs). The SBP expects its FX reserves by June 2025 to be around US$13bn.
§ Monetary aggregates (M2 growth) is broadly in line with the monetary policy, encouragingly driven mostly by deposit growth. Weak private credit growth support the outlook for moderate inflation across FY25. Sustaining the current monetary policy, however, depends a great deal on the gov’t achieving the envisioned fiscal consolidation (a primary surplus of 2% of GDP).
Outlook and market reaction: We think the SBP will likely maintain the dovish stance through the rest of the year, given its projections for key macro indicators (mostly moderate). The market will likely respond positively to the decision, even if it was majorly expected. The outlook for continued easing will help the market to somewhat ignore the recent rise in political noise. Our top picks are UBL, MCB, HBL, LUCK, MUGHAL, INDU, SYS, OGDC and POL.
Courtesy – Intermarket Securities Limited.
