BR research talked to five banks treasury officials, and the consensus view is that the interest rates have bottomed out for the next two quarters. They all expect SBP to maintain status quo in the upcoming monetary policy on 15th September.
They all have cited two reasons for the cautious approach. One is the food inflationary impact due to floods (and even without it, the food prices were moving up), and SBP choosing to appreciate the currency when there is a constant payments pressure in the forex market.
SBP cannot appreciate the currency and lower interest rates. They must pick one. Since they are choosing currency to slightly appreciate, rates cannot be cut, without disturbing the equilibrium. “For SBP and authorities in twin cities, exchange rate is more important, thus they are sacrificing on the possible interest rate cut”, noted treasury head of a bank.
“There is lull in the market and payment pressure continues. Already the chances of rate cut were thinning and now floods have reinforced the position that SBP may not cut at all for the next two quarters”, added treasury head of another bank. “The writing is on the wall that SBP is clear to not cut”, he emphasized
This implies that rates in the money market may adjust – especially the Islamic instruments where rates are currently below 10 percent. Even, there is room for one-year paper in conventional market to slightly move up. OMO funding is around 11.1 percent while the 1-year paper is at 11.0 percent, if no rate cut is in offing, the secondary market rates would move up.
“MPC will refrain from any cut and even indication of any rate cut in future”, confidently said one treasury officer. “Dollar is trading at 281 while the payment pressure continues. There is no extra ordinary pressure, but clearly the market is stressed”, he added.
However, the expectations are building up that SBP may continue to appreciate the currency. As per calculations of a bank, the current REER is around 102 and with dollar in pressure in the international market, there is a long way to go to reach 105. Hence, the currency may continue to slightly appreciate.
Exporters are reluctantly internalizing the fact and have now started forward booking in anticipation of further currency appreciation. The story of remittances is similar as last month – one big bank senior executive expects the toll to remain $3.1-3.2billion in August. With exports stagnating, growing import pressure is a concern.
SBP is holding on the incentive on remittances. Even with the subsidy, banks made losses in the remittance business in the last two quarters, as UBL CEO recently mentioned in an analyst briefing that the bankmade a loss of Rs3-4 billion in the last quarter. Earlier, Alfalah Bank CEO said that the bank had made Rs 9 billion loss in 1HCY25.
Absence of incentive is a roadblock towards further growth in the remittances. According to some bankers, government and SBP may continue with no subsidy formula till the market does not misbehave. If the pressure in the forex market intensifies, SBP may promptly introduce subsidies to lure banks to attract more inflows.
Economic stabilization must cover some journey before it to translate into a growth momentum, and for that forex reserves building is the key. And if SBP wants to reach its target of over $17 billion in FY26 amid strengthening currency, it must be extra cautious on monetary policy.
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