Pakistan Central Bank Poised for Further Rate Cuts Amid Cooling Inflation
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Easing inflationary pressures and strengthening economic indicators suggest the State Bank of Pakistan (SBP) is likely to reduce its key policy rate by 50 basis points at its upcoming meeting on January 26, according to a recent Reuters poll. This potential move builds on a surprising rate cut in December, signaling a decisive shift away from the aggressive tightening cycle of 2023.
Inflation and Economic Factors Drive Expectations
The anticipated rate reduction is supported by a recent slowdown in inflation, improved foreign exchange buffers, and a stabilizing rupee. Data released indicates inflation decelerated to 5.6% year-on-year in December, driven by declines in perishable food costs. While headline inflation has remained within the SBP’s 5-7% target range from July through November, concerns persist regarding core inflation, which officials describe as “sticky.”
A majority of analysts surveyed – seven out of ten – predict a 50 basis point cut. Two analysts foresee a more substantial reduction of 75 basis points, while one anticipates the central bank will maintain current rates. The median forecast aligns with the 50 basis point reduction.
Reversing Course: A Significant Shift in Monetary Policy
Should the SBP proceed with a 50 basis point cut, the policy rate would fall to 10.5%. This would represent a significant reversal from the peak of 22% reached in 2023. Since mid-2024, the SBP has already implemented cumulative rate cuts totaling 1,150 basis points.
“The inflation outlook has eased marginally and external buffers have strengthened, giving the SBP room to support growth,” noted a leading equity research analyst at JS Global Capital. Despite this positive outlook, the analyst added that expectations remain anchored given ongoing concerns about elevated non-food inflation.
Divergent Views on the Pace of Easing
While many analysts support a 50 basis point cut, some argue for a more aggressive approach. Experts at Arif Habib Limited suggest that current macroeconomic conditions are conducive to more decisive easing, pointing to improving growth momentum and stable reserves. They believe Pakistan is nearing a return to a single-digit policy rate.
However, a cautious contingent warns against moving too quickly. One analyst at KTrade cited 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 steady until July.
IMF Cautions Against Premature Easing
The International Monetary Fund (IMF) has also cautioned against premature monetary easing, particularly in light of Pakistan’s $7 billion loan program. This underscores the delicate balance the SBP must strike between supporting economic growth and maintaining financial stability.
The coming weeks will be crucial as the SBP weighs these competing factors and determines the appropriate course for monetary policy. The January 26 meeting will be closely watched by investors and economists alike, as it will provide further insight into the central bank’s outlook for the Pakistani economy.
