Rate cut likely amid low inflation, IMF review

KARACHI: Most analysts predict a seventh consecutive rate cut by Pakistan’s central bank on Monday, amid the country’s first International Monetary Fund (IMF) review for its $7 billion bailout and near-decade low inflation.

Pakistan’s central bank’s current easing cycle, one of the most aggressive among emerging markets, follows a six-month series of rate cuts totalling 1000 basis points (bps), which brought the key rate down from a record high of 22% in June to 12%, with the latest 100 bps cut in January.

As Pakistan undergoes economic reforms mandated by the IMF programme, it stands to secure additional funding from the global lender, pending the ongoing review.

The cash-strapped South Asian nation could unlock a tranche of funding if the ongoing review is approved, ahead of its annual budget presentation looming in June.

Inflation for the month of February clocked in at a near decade low of 1.5%, largely due to a high base a year-ago.

A Reuters survey of 14 analysts suggests that the central bank may further reduce rates, with a median forecast of a 50 bps cut.

Of the 10 analysts who expect a rate cut: three anticipate a 100 bps cut, one a 75 bps cut, and six a 50 bps cut. The remaining four analysts predict no change.

Most analysts predicting a rate cut believe the central bank will stop reductions when rates hit 10.5-11%, due to a potential inflation rise and anticipate a moderate rise in inflation from March to May.

Ahmad Mobeen, senior economist of S&P Global predicts inflation will “bottom out” in Q1, then gradually rise.

He anticipates a 6.1% average inflation for 2025. Despite the “sharp drop” in the Consumer Price Index (CPI), he notes that urban core inflation, indicative of ongoing price pressures, remains high at 7.8%.

“The S&P Global HBL Pakistan Manufacturing PMI also indicates rising input costs, pushing manufacturers to hike prices in February 2025 at the fastest pace since October 2024,” he said.

In the last policy meeting, the bank maintained its forecast of full-year GDP growth at 2.5%-3.5% and predicted faster growth would help boost the country’s previously struggling foreign exchange reserves.

“While GDP posted 0.9% growth in 1QFY25, large-scale manufacturing remains in negative territory, and production has yet to gain momentum. The transmission of lower rates to economic activity is yet to be seen,” said Sana Tawfik, head of research at Arif Habib Limited.

She added that the target is only possible if industrial activity picks up and agricultural output improves.