Pakistan Central Bank Rate Cut Expected: SBP Policy Update January 2024

Pakistan’s central bank, the State Bank of Pakistan (SBP), is widely anticipated to lower its key policy rate at its upcoming meeting on January 26th. A Reuters poll of analysts indicates a strong expectation for a reduction, driven by easing inflation and improved economic indicators, though some caution remains regarding potential risks.

Rate Cut Expectations

Seven out of ten analysts surveyed predict a 50 basis point cut to the policy rate. Two analysts foresee a more substantial decrease of 75 basis points, while one anticipates the SBP will hold rates steady. This potential cut follows a surprise 50 basis point reduction in December, which ended a four-month period of unchanged rates.

Did You Know? Pakistan’s policy rate peaked at a record 22 percent in 2023.

Shift in Monetary Policy

A 50 basis point cut would bring the policy rate to 10.5 percent. This signals a significant shift away from the aggressive tightening cycle implemented by the SBP, which saw cumulative cuts of 1,150 basis points since mid-2024. Analysts cite moderating inflation, increased foreign exchange reserves, and a more favorable balance of payments as justification for easing monetary policy.

Differing Perspectives

While a 50 basis point cut is the median forecast, opinions vary. Some analysts, like Sana Tawfik, head of research at Arif Habib Limited, believe Pakistan is nearing a single-digit policy rate due to improving growth, stable reserves, and inflation below the central bank’s medium-term target. However, others express caution.

Expert Insight: The divergence in analyst expectations highlights the delicate balance the SBP faces. While economic indicators suggest room for easing, persistent core inflation and external geopolitical factors introduce considerable uncertainty.

Fawad Basir, head of research at KTrade, points to geopolitical uncertainty and its potential impact on fuel prices as reasons for a more measured approach. AKD Securities anticipates the central bank may hold rates unchanged until July.

Inflation and External Factors

Recent data shows inflation slowed to 5.6 percent year-on-year in December, with monthly prices declining due to lower food costs. However, non-food inflation remains elevated. The SBP has noted that inflation remained within its 5-7 percent target range from July to November, but warns that core inflation is “sticky” and headline inflation could temporarily rise due to base effects. The International Monetary Fund has also cautioned against easing monetary policy prematurely, given Pakistan’s $7 billion loan program.

Frequently Asked Questions

What is a basis point?

A basis point is one-hundredth of a percentage point. So, 50 basis points equals 0.50 percent.

What factors are influencing the SBP’s decision?

Easing inflation, improving foreign exchange reserves, and a stabilizing rupee are bolstering the case for monetary easing, but persistent core inflation and geopolitical risks are causing some caution.

What was the previous policy rate?

Following the surprise cut in December, the policy rate was reduced to 10.5 percent.

How will these potential changes impact Pakistan’s economic trajectory in the coming months?