KARACHI: Most economists believe the State Bank of Pakistan (SBP) will reduce its policy rate by 200 basis points in its upcoming November meeting, marking the fourth consecutive cut since June, thanks to a decline in inflation, a low current account deficit and higher remittances.

The previous three cuts have collectively lowered the benchmark interest rate by 450 basis points, bringing it down to 17.5 per cent from an unprecedented high of 22pc.

However, despite this major cut, the economy has not shown strong signs of recovery. Growth expectations remain subdued, with forecasts not exceeding 3.2pc, while the large-scale manufacturing (LSM) sector recorded negative growth during the first two months of FY25.

Experts suggest that the sharp decline in inflation is the key reason behind the downward trend in interest rates. Still, many argue that the economy requires more substantial cuts to stimulate trade and industrial activity. Trade and industry representatives have been calling for a reduction in the interest rate to around 10pc, slightly above the inflation rate.

Analysts expect central bank to slash interest rate by up to 200bps

“The primary driver behind the expected rate cut is the significant drop in inflation, which fell to 6.9pc in September 2024 (lowest in 44 months) and is expected to ease further to 6.3pc in October,” said Tahir Abbas, head of research at Arif Habib Ltd.

He anticipates a 200bps cut in the upcoming monetary policy decision scheduled for Nov 4, which would lower the policy rate to 15.5pc, a level last seen in November 2022 when the rate stood at 16pc.

Faisal Mamsa, CEO of Tresmark, said that while the market has largely priced in a 200bps cut, some traders are speculating a larger reduction. However, this is unlikely, as the Monetary Policy Committee (MPC) is expected to adopt a cautious approach given that the economy is still stabilising, he added.

He warned that a more aggressive cut could place the rupee under pressure and negatively impact hot money inflows, particularly as other emerging markets like Turkiye, Egypt and Nigeria are offering higher interest rates.

A research report by Topline Securities also predicts a 200bps rate cut, which would bring the total reduction in the last four to five months to 650bps.

“We expect the policy rate to drop to 13-14pc by June 2025,” the report stated. Such a rate would be attractive for domestic investors and industries struggling with high electricity costs, which have made the cost of doing business unsustainable.

Published in Dawn, October 24th, 2024