Policy Rate reduced by 150bps to 20.5%; Higher than expectations

Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) has announced reduction in Policy rate by 150bps to 20.5% after maintaining status quo for approx. one year since Jun 23, 2023. This rate cut is higher than market expectations gauged through various polls. Furthermore, this is the first rate cut in last four years since Jun 26, 2020.

Poll Results: According to the results of poll conducted by Topline Research, 43% of participants expected the policy rate to decline by 100bps.

Similarly, in a survey conducted by CFA Society Pakistan, 48% expected the policy rate to decrease by up to 100bps. In a survey conducted by Bloomberg, 63% of the participants expected 100bps decline in key rate.

Rationale behind the decision: MPC noted that, May 2024 inflation outturns were better than expected and amidst tight monetary policy coupled with fiscal consolidation, underlying inflation pressures are also subsiding.

Nevertheless, there remains some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments, MPC viewed. However, committee noted that, cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check.

Outlook on Economic Indicators for FY24 and FY25: SBP believes that, inflation will fall on lower band of the 23-25% for FY24 and medium term target of inflation remains same at 5-7% by Sep-2025. However, SBP didn’t comment on macro numbers for FY25 at the moment and will provide view on this in next monetary policy briefing, post Budget FY25 and IMF measures.

We expect inflation to clock in range of 13-13.5% for FY25 compared to 23.5% in FY24. On interest rate we expect, interest rate to come down by 600-700bps by Jun 2025.

External Repayments: During last 11MFY24, SBP has repaid US$10.7bn while another US$1bn will be repaid in Jun 2024. This takes total repayments to US$11.7bn for FY24. This is in addition to the rollovers of US$11-12bn in FY24, suggesting gross requirement of US$22.7-23.7bn. Separately, in Jul 2024, external repayments are close to $2bn, while, in SBP liquidity data sheet, repayments for Jun and Jul 2024 were US$10.2bn. SBP clarified that, rest of the amount will be rolled over.

FX Reserves target end Jun 2024: SBP expect reserves by end Jun 2024 will remain above US$9bn despite repayment of around US$$1bn in remaining period Jun 2024.

Dividend and profit repatriation for 11MFY24: SBP has cleared most of the backlog of the dividends and profit repatriation. In the month of May 2024, dividend payments were around US$1bn, taking total payments FY24TD to approx. US$2bn.

Other key takeaways

On question related to variation in data of SBP and IMF over repayments/amortization of foreign payments, SBP mentioned that, difference is due to the treatment of numbers. As per SBP, IMF doesn’t account for some of the maturities and this shouldn’t be a cause of concern.

Further SBP highlighted that, external repayments data to SBP is provided by Economic Affairs Division and this is the same body which provides data to IMF as well.

SBP mentioned that, room for further cut in interest rate will be dependent on post budgetary and IMF measures assessment.

In current rate cut, SBP has modelled the budget and IMF measures known to them. However, actual measures will cause deviation in inflation outlook.

 Courtesy – Topline Research



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