A brokerage house sees “strong possibility” that the State Bank of Pakistan (SBP) may cut the key policy rate by 100 basis points (bps) in its upcoming Monetary Policy Committee (MPC) meeting scheduled on March 18 (Monday).
Arif Habib Limited (AHL), in its report released on Tuesday, said there is a “strong possibility that the SBP may contemplate kickstarting the interest rate reversal cycle by implementing a 100bps cut in the upcoming policy”. The key policy rate already stands at a record high of 22%.
The brokerage house attributed its projection to a decline in the inflation rate and money market yields.
AHL said that the market opinions remain divided, with some anticipating the MPC to maintain the status quo as Pakistan is in the process of negotiating a new International Monetary Fund (IMF) program given that the IMF has consistently advised maintaining a tight monetary policy stance.
“However, we believe that a data-driven approach will be pivotal in forming the SBP’s decision-making process,” it said.
“This approach would likely take into consideration the downward trajectory of both headline and core inflation, which we anticipate to average approximately 17% and 15% respectively (on a 12-month forward basis), resulting in significantly positive real interest rates on a forward-looking basis,” it said.
Highlighting signs of an expected rate cut, AHL noted that its projections point towards a downward trajectory in headline inflation, more prominent towards the latter half of FY24.
“The average MoM rate is projected to hover around 1.2% in 2HFY24, a decrease from the 1.6% average witnessed in 1HFY24. This forecast culminates in an estimated annual average of ~25% for headline inflation in FY24.
“Several contributing factors, including the substantial base effect, stabilization of global commodity prices, support from the stability of the PKR against the USD, and efforts to curtail the current account deficit, underpin these expectations,” it added.
Meanwhile, the money market yields have also witnessed a declining trend, noted the brokerage house.
“In the primary market, yields across various tenors have decreased, with reductions observed in 3-month, 6-month, and 12-month yields by 1.4%, 2.6%, and 2.7%, respectively.
“Similarly, in the secondary market, yields have experienced declines ranging from 1.6% to 2.6%. Moreover, longer tenor bonds also reflect this trend… This decline in money market yields suggests a growing sentiment towards a potential rate cut, as reflected by market participants,” it said
Poll results
AHL said it conducted a survey in order to find out what the market is expecting in the upcoming monetary policy.
Its respondents included banks, asset management companies, insurance, and development financial institutions as well as representatives from non-financial services/manufacturing sectors.
In its results, it found that 53% of the total respondents are of the view that the SBP will maintain the policy rate, while 47% anticipate a rate cut.
Among those expecting a cut, 27% foresee a reduction of 100 bps, 17% expect a cut of less than 100 bps, and 3% anticipate a substantial decrease of 200 bps in the upcoming MPC.
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