We believe a 100bps rate cut is imminent in the next scheduled monetary policy meeting on 27th Jan’25 (the first MPC meeting of CY25). This could lower the policy rate to 12%, a level last seen in March ’22, when it was 9.75%. 

This would mark the sixth consecutive rate cut since the interest rate reversal began in Jun’24, signalling the country’s improving macroeconomic outlook.

Macroeconomic indicators that support our call for 100bps rate cut:

• The main factor driving these changes is the sharp decline in inflation, which has eased to 4.1% in Dec’24 (the lowest in 80 months) and is expected to further ease to 2.8% in Jan’25.
• In 1HFY25, the current account surplus increased to USD 1,210mn, reversing the deficit of USD 1,397mn seen in the same period last year
• Remittances surged by 33% YoY in 1HFY25, reaching USD 17.8bn, providing critical support to the external sector.
• The policy rate cut is expected to reduce production costs for industries, which should stimulate demand that has been suppressed by high costs. This comes after a 1.3%YoY decline in LSM growth for 5MFY25.
• Additionally, the SBP’s reserves increased to USD 11.7bn in Jan’25, up from USD 9.4bn in Jun’24. This rise was supported by the IMF’s first tranche of USD 1bn from the 37-month EFF facility received during 7MFY25, along with inflows from institutions like the ADB and SBP buying from the open market. This boost in reserves strengthens the SBP’s position to lower interest rates while minimizing the risk of currency instability, as shown by the currency’s modest 0.18% depreciation for FYTD.

Courtesy – AHL Research