As the State Bank of Pakistan’s monetary policy meeting on July 29th, 2024, approaches, speculation is rife: will the SBP extend its recent easing policy or hold steady?

We’re expecting a 100bps cut, which could lower the policy rate to 19.5%, the lowest level since March ’23.

To highlight, the last monetary policy was held on June 10th, 2024, after which two significant events occurred: the announcement of the FY25 Budget and Pakistan’s entry into a new 37-month IMF EFF program worth USD 7bn.

Some key improvements in macroeconomic indicators of late that bolster our expectation of a rate cut are as follows:

First and foremost, a key factor bolstering the expectation of a rate cut is the major decline in Pakistan’s inflation rates. Both headline and core inflation have significantly improved. For FY24, the average headline inflation has dropped to 23.4% from 29.2% in the same period last year. Jul’24 is projected to see inflation fall further to around 10.5%, which would result in a real interest rate of 1,000bps—far surpassing the historic 10-year average of -44bps.

Moreover, the current account deficit for FY24 has substantially decreased to USD 681mn, marking the lowest deficit in 13 years. This represents a significant improvement compared to the USD 3.3bn deficit recorded in FY23. The sharp reduction in the deficit has been driven primarily by a decrease in the trade deficit and an increase in remittances. This positive trend has contributed to the stabilization of the PKR, which saw a modest appreciation of 0.1% against the US dollar in FY24.

Courtesy – AHL Research