SBP’s rate cut cycle nears end, says brokerage house ahead of MPC

The State Bank of Pakistan (SBP) is expected to maintain its rate-cutting cycle and might opt to further reduce the key policy rate by up to 100 basis points (bps) on account of lower inflation and external sector stability, a brokerage house survey stated.

The survey found that 36.8% of the respondents expect a reduction of 100bps, followed by 21.1% predicting 150bps cut, while 10.5% anticipate a 50bps reduction in the policy rate, Arif Habib Limited (AHL) said in a report released on Thursday.

It added that a clear majority was in favour of a rate cut, with 74% anticipating the SBP would ease monetary policy. “Meanwhile, 26% believe the policy rate will stay the same at 12%,” it said.

In the previous meeting, the MPC decided to further cut the policy rate by 100bps to 12%. Cumulatively, the policy rate has been reduced by 1000 bps since June 2024.

The Monetary Policy Committee (MPC) is scheduled to meet again on March 10 to decide on the monetary policy.

“The easing cycle is not over yet, we believe, but the runway for further rate reductions is getting shorter,” AHL said.

The brokerage house expects SBP to extend its rate-cutting cycle with another 50bps reduction in the upcoming monetary policy review, “bringing the policy rate to 11.5%”.

“Given the sharp decline in inflation and stable reserves, a 50bps rate cut seems like a logical step in the upcoming policy meeting,” it said.

This would be the seventh consecutive rate cut since the interest rate reversal began in June 2024

AHL noted that while the easing trend has been fueled by a sharp decline in inflation and external sector stability, “emerging concerns suggest the SBP may soon shift to a more cautious stance”.

“With inflationary pressures likely to re-emerge and market yields creeping up, the end of the rate cut cycle may be closer than anticipated,” it said.

The brokerage house highlighted that with core inflation remaining elevated, the current account turning red, and market yields creeping up, “SBP is likely to adopt a more measured approach going forward”.

“The days of aggressive rate cuts could be behind us, and we may now be entering a phase of cautious recalibration,” it added.

The respondents included participants from financial services such as banks, asset management companies, insurance firms, and development finance institutions, and non-financial services/manufacturing sectors, including exploration and production, cement, fertilisers, steel, textiles, and pharmaceuticals, AHL said.