Analysts foresee yet another drop in interest rates: survey

Pakistan’s inflation rate sits comfortably at its lowest level in nearly 10 years, causing analysts to predict yet another policy rate cut by the State Bank of Pakistan (SBP). According to reports, if passed, this would be the seventh consecutive cut in interest rates.

The SBP was able to reduce inflation rates by raising interest rates to approximately 22 percent. This measure curbed demand for consumer and business loans. In the past six months, however, interest rates have plummeted by a staggering 1,000 basis points (bps) as the SBP enjoyed successes in its battle against inflation.

The most recent cut over the six months was announced in January, which resulted in a 100 bps reduction. While this has significantly boosted commercial activity, independent investors and business owners have been calling for additional slashes in order to boost debt-fueled expansion.

Currently, the official interest rate stands at 12 percent. Despite SBP’s policy rate cuts, inflation levels remain locked in their free fall. However, reports indicate that falling interest rates are associated with the ‘base effect’ of the inflation rate the economy experienced in the previous periods.

The base effect in this context entails that subsequent increases in the prices of goods and services have been limited after inflation rates touched their peak of almost 38 percent in May 2023. However, the effect of inflation from the previous period reportedly continues to diminish the purchasing power of Pakistani citizens and businesses alike.

A survey of 14 analysts from a reputable institution revealed the SBP could consider cutting rates again. However, it is uncertain what the final rate cut will be as experts do not have a unanimous answer.

According to credible reports, the median cut in policy rates is 50 bps. This is because three analysts foresee a large 100 bps cut, while six believe that the SBP may reduce the rate by 50 bps.

Only one analyst has predicted a cut of 75 bps with the other four analysts believing that interest rates will remain anchored with no changes at all.

Experts believe that policy rates will continue to fall till they reach approximately 10.75 percent. This prediction is made on the belief that inflation rates could rise in the coming months. There is some merit to these claims, as a recent report from the Ministry of Finance (MoF) projected growing inflation levels starting in March.

If interest rates fall yet again, many believe that Gross Domestic Product (GDP) may witness a boost because of a rise in investment levels in the economy.