Policy rate decision today: Will SBP meet market expectations?

ISLAMABAD: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) is set to announce a new policy rate today with widespread speculation about whether the central bank will implement a rate cut and, if so, by how many basis points.

Market expectations lean towards a reduction in policy rate to align with recent decline in inflation despite the Consumer Price Index (CPI) rising from 6.9 per cent to 7.2 per cent in October.

Month-on-month, the CPI increased by 1.2 per cent, in contrast to a 0.5 per cent decrease the previous month and a 1 per cent rise in October 2023. The average CPI for first four months of the FY25 stands at 8.68 per cent. A substantial drop from 28.45 per cent during the same period last year.

However, the October inflation figure slightly exceeds official forecasts, which anticipated inflation would remain between 6 per cent and 7 per cent and drop to between 5.5 per cent and 6.5 per cent by November.

According to the finance ministry’s monthly economic update, inflation continues to pose a significant challenge in Pakistan, despite a considerable decrease from a record high of 38 per cent in May 2023.

Nonetheless, expectations for a rate cut remain high, with the critical question being the extent of the cut.

There are concerns that the central bank may not fully respond to market demands, particularly given the gap between the International Monetary Fund (IMF) targets and actual economic performance. The commitments and quarterly targets set by the government have not been fully met.

The last MPC report indicated that inflation is on a downward trajectory, is under control, and unlikely to spike, suggesting that the economy is stable and that the risk of recession or deflation is minimal.

However, there is uncertainty about how quickly the central bank will act. The SBP has started repurchasing Market Treasury Bills (MTBs), which is viewed positively, but economic activity has not surged as expected.

Bank lending has not effectively stimulated economic growth as evidenced by the low levels of the Advances to Deposits Ratio (ADR). Much of the funding is used to reduce government securities and for Open Market Operations (OMO) which helps to bring the debt down.

This situation is concerning for the overall health of the economy and the upcoming monetary policy statement needs to address these issues. It remains unclear whether the ADR concerns have been discussed among MPC members but they should be mindful of this factor as it could lead to recession.

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