SBP has room to cut policy rate: analysts

KARACHI: Researchers and analysts say the State Bank of Pakistan (SBP) could reduce its policy rate by 100 to 150 basis points at Monday’s Monetary Policy Committee meeting.

The upcoming monetary policy review is of high importance, particularly given the declining trend of inflation and a stalemate-like situation for economic growth.

Despite some firm arguments in favour of maintaining the interest rate at the current level, some analysts said the situation is conducive to cutting it.

Analysts said the average forward 12-month inflation pattern is expected to be around 15pc to 16pc, which means the current interest rate of 22pc is much higher in this context.

Say cheaper financing could bolster economic activities

“I believe the State Bank of Pakistan now has the option to reduce the interest rate up to 150bps in the next monetary policy,” said Pak Kuwait Investment Company Ltd Head of Research Samiullah Tariq.

Researchers and analysts said it looks like an interest rate cut is due since the unprecedentedly expensive borrowing rate has caused too much loss to the economy, particularly the cost of doing business, which has grossly suppressed the manufacturing sector.

During the current fiscal year, the SBP has maintained its policy rate steady at 22pc, waiting for inflation to come down. The CPI-based inflation started slowing down in the second half to 20.7pc in March. Both the Ministry of Finance and SBP believe the inflation to decelrate further to 17pc in April.

Some bankers believe easing inflationary pressures would help stimulate economic activities, which have remained subdued and fallen to an extremely low level in FY23 and FY24.

Faisal Mamsa, CEO of Tresmark, found many reasons for the cut and no-cut as he analysed the situation against the background of both the domestic and global scenario.

A senior analyst said it was risky to comment on a rate cut since the central bank had already surprised the financial market earlier by keeping it unchanged when most financial experts expected an easing.

He said the finance minister has recently hinted at a rate cut as inflation is coming down, which may allow the SBP to bring down the borrowing cost to an affordable level for businesses and industries.

Analysts think a cut is necessary to bolster economic growth as the IMF and the World Bank predicted Pakistan’s GDP expanding by 2pc in FY24.

At the same time, high-interest rates have also burdened the economy with costly borrowing from banks. The government borrowed Rs5.3 trillion from banks in FY24 and would have to consume about 90pc of the tax revenue in debt servicing.

Published in Dawn, April 28th, 2024