SBP likely to cut policy rate as CPI inflation continues to ease

ISLAMABAD: The State Bank of Pakistan (SBP) may consider reducing the policy rate by 150 basis points (bps) at the upcoming Monetary Policy Committee (MPC) meeting, given the continued slowdown in Consumer Price Index (CPI)-based inflation.

Although the SBP has yet to release the schedule for the next MPC meeting, recent economic indicators suggest a further decline in inflation.

According to a report by JS Global on Saturday, the CPI for July 2024 is expected to cool down to 10.5 per cent, despite a month-on-month increase of 1.6 per cent. This would leave Pakistan’s real interest rate (RIR) at an elevated 10 percentage points.

The report highlighted that even after a 1.5 per cent cut in June 2024, which brought the policy rate down to 20.5 per cent, the RIR remained at 8 percentage points. This reduction followed a significant drop in inflation from 38 per cent a year ago to 12.6 per cent in June 2024.

JS Global believes that the trend of decreasing inflation supports the case for continued monetary easing. “We expect another 1.5 per cent cut in the upcoming Monetary Policy Statement (MPS),” the report stated.

Additionally, BMI, a Fitch Solutions Company, projected in its ‘Pakistan Country Risk Report’ published on July 15, that the SBP will reduce the key policy rate at its next MPC meeting. BMI forecasts that the policy rate will be cut to 16 per cent by the end of 2024 and further to 14 per cent by the end of 2025.

On June 10, the SBP’s MPC decided to lower the key policy rate by 150 bps, marking the first cut in four years and bringing it to 20.5 per cent. The MPC noted that the significant decline in inflation since February was in line with expectations, with May’s inflation figures better than anticipated.

The MPC’s statement emphasised that underlying inflationary pressures are subsiding due to a tight monetary policy stance and fiscal consolidation. This is evidenced by the continued moderation in core inflation and easing inflation expectations among consumers and businesses.

However, the MPC also acknowledged potential risks to the near-term inflation outlook, including budgetary measures and uncertainty regarding future energy price adjustments.

Despite these risks, the Committee believes that previous monetary tightening measures will continue to mitigate inflationary pressures.

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