The State Bank of Pakistan (SBP) is anticipated to reduce its key interest rate once more during its upcoming policy meeting on Monday.
This will be the first meeting following the recent staff-level agreement with the International Monetary Fund (IMF) and the announcement of a new state budget, according to analysts.
Earlier this month, Pakistan and the IMF reached an agreement on a 37-month loan programme. The deal has introduced stringent measures, including increased taxes on agricultural incomes and higher electricity prices, which have sparked concerns among lower and middle-income citizens already struggling with inflation and the potential for increased taxes.
In June, the SBP lowered its key interest rate by 150 basis points, reducing it from a historic high of 22 per cent. This marked the central bank’s first rate cut in nearly four years, aimed at stimulating economic growth amid a significant decrease in retail inflation. Inflation had dropped to 12.6 per cent in June, down from 38 per cent in May 2023.
Out of 14 analysts surveyed, only one predicted that the SBP would maintain the current rate of 20.5 per cent. The majority forecast a rate cut, with seven analysts expecting a reduction of 100 basis points, five anticipating a 150 basis points cut, and one predicting a 200 basis points decrease.
Mustafa Pasha, Chief Investment Officer at Lakson Investments, noted that the anticipated inflationary surge following the budget has not occurred. The central bank had previously cautioned about potential inflationary pressures from the budget, citing insufficient progress on structural reforms to expand the tax base.
To compensate, the government set a demanding tax revenue target of Rs13 trillion ($47 billion) for the current fiscal year, representing a nearly 40 per cent increase from the previous year, and aims to reduce the fiscal deficit to 5.9 per cent of GDP from 7.4 per cent in the previous year to secure essential IMF funding.
Pasha added that the clarity on the IMF programme, currency market stability, and steady foreign inflows into domestic debt and equities provide “ample comfort to the SBP to continue easing the policy rate in July and beyond.”
