Pakistan economy: Monetary Policy Survey; 51% expect no change while 49% forecast a reduction in interest rates

In order to gauge the view on monetary policy outlook, Topline Research conducted a poll of key market participants on expectations over policy rate and key macro estimates and it was found that approximately half of the respondents anticipated no change (51%), while the remaining half (49%) predicted a reduction in interest rates. No participant expected an increase in the rates.

Among those expecting a cut, 2% foresaw a reduction of 25 bps, 12% expected a cut of 50 bps, 29% anticipated a cut of 100 bps, and 6% of participants expected it to decrease by more than 100 bps

In last monetary policy survey conducted on Mar 13, 2024, 55% of participants expected the policy rate to remain unchanged at 22%, while the remaining 45% anticipated a policy rate cut. Among those expecting a cut, 2% foresaw a reduction of 25 bps, 10% expected a cut of 50 bps, 24% anticipated a cut of 100 bps, and 9% of participants expected it to decrease by more than 100 bps.

As for the timing of the first rate cut in case of no change this time, 71% of participants expected the first cut to occur in June-2024, while 18% anticipated it in 3Q2024, and 11% expect the first cut to be in 4Q2024.

SBP’s next Monetary Policy Committee (MPC) meeting will be held on Apr 29, 2024. In latest MPC meeting held on Mar 18, 2024, SBP decided to keep the policy rate unchanged.

While arriving at the decision, MPC noted that inflation, in line with earlier expectations, had begun to decline noticeably from 2HFY24. However they also observed that despite the sharp deceleration in February, the level of inflation remained high and its outlook is susceptible to risks amidst elevated inflation expectations. This warrants a cautious approach and requires continuity of the current monetary stance to bring inflation down to the target range of 5-7% by Sep 2025. “This assessment is also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows,” reiterated the committee.

Concerning the question about the expected Policy Rate in Dec 2024, 41% of the participants anticipated the rate to be in the range of 16-18%, and 51% of participants anticipated the policy rate to be in the range of 18-20%. Additionally, 4% expected the rate to be in the range of 14-16%, and another 4% expected the rate to be in the range of 20-22%. On the other hand, no one expect it to be below 14% or above 22%.

Since the last MPC meeting on Mar 18, 2024 new developments have taken place which will likely be considered by the central bank committee in upcoming meeting, which include: a fall in CPI inflation from 23.1% in Feb-2024 to 20.7% in Mar-2024, SBP FX Reserves at US$8bn despite US$1bn Eurobond payment, Pakistan posting a Current Account Surplus of US$128mn in Feb-2024 compared to a Current Account Deficit of US$303mn in Jan-2024, a 2.5% increase in international oil prices and average 3% increase in local fuel prices, the rupee largely remaining stable against the US dollar and the escalation in tension between Iran and Israel.

Furthermore, Muhammad Sohail, CEO, Topline Securities said, “In the recent T-Bill auction held on April 17, we saw mixed participation in 3-month and 12-month bonds, where the cut-off yield remained unchanged at 21.66% and 20.89% respectively.”

Sohail believes the SBP will maintain cautious approach despite the above encouraging trends and adopt a ‘watch and see’ approach until the inflation trend maintain its fall. Key risks to the inflation trajectory include increase in international prices, delay in release of IMF funds, IMF demanding additional tax measures to meet revenue target in case of any shortfall, and pressure on the dollar against rupee mainly due delay in getting dollar inflows.

“We believe the SBP will keep the policy rate unchanged at 22% in the upcoming MPC meeting,” he added.