Policy rate expected to fall by 7% in 2024, report says

The State Bank of Pakistan (SBP) is expected to reduce its benchmark policy rate by seven percentage points to 15 percent in the upcoming calendar year.

This move is expected to rejuvenate affordable financing for industries heavily dependent on bank borrowing, particularly in sectors such as textile, cement, steel, and agriculture.

The projection comes from a report titled “Commercial Banks Overcoming Headwinds – Resilient Near-Term Profitability Expected” by Arif Habib Limited economist Sana Tawfik.

The report, as reported by Express Tribune, suggests that despite the assumption of reduced earnings following the rate cut and the imposition of a 40 percent tax on windfall income from speculative rupee-dollar exchange business, commercial banks are expected to achieve a 12 percent growth in net profits in 2024.

Tawfik stated that energy sectors, including oil and gas exploration firms and power companies, would also benefit indirectly from the policy rate cut.

The report forecasts a 3.3 percent economic growth in the current fiscal year, attributing it to monetary policy easing, which is expected to benefit industrial, agricultural, and services sectors.

The economist suggests that the central bank may initiate a token reduction of 50-100 basis points in the policy rate in its January 2024 monetary policy announcement.

The rate cut is expected to coincide with a significant easing of inflation from March 2024 onwards, although inflation is projected to remain elevated in November at around 28pc, primarily due to a substantial hike in gas prices.

The government stands to gain significantly from the rate cut as it will reduce interest payments on the mounting debt, providing fiscal space for necessary development expenditures and stimulating economic activities.

The current account deficit is expected to remain around $4 billion, coupled with rupee stability, supporting economic growth.

The report also suggests that the Pakistan Stock Exchange (PSX) is poised for substantial growth as major financial institutions shift investments to the stock market from fixed-income instruments.

The report concludes that near-term profitability for the banking sector is expected to remain robust in the first half of calendar year 2024, despite potential headwinds from a reversal in the policy rate cycle.