The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) is set to hold its first meeting of the year on January 29, 2024, against a backdrop of market speculation about possible changes to the current policy rate of 22%.
Recent insights from a Topline Research poll, which surveyed key market players, reveal that a majority (68%) believe the policy rate will remain unchanged. However, a substantial minority (32%) is betting on a rate cut, with varied expectations ranging from a slight decrease of 25 basis points to a significant cut exceeding 100 basis points. Notably, none of the surveyed participants anticipate an increase in the policy rate, despite an unexpected decline in Treasury Bill (T-Bill) yields.
Projections for the timing of the first rate cut vary, with 56% expecting it in March 2024, should there be no change in the upcoming meeting. Others predict the cut will occur in April (18%), June (13%), or even after June 2024 (13%).
The MPC’s last meeting on December 12, 2023, concluded with the decision to maintain the policy rate, in line with market expectations. The Committee emphasized the positive outlook for real interest rates and projected a downward trajectory for inflation, aiming to reach the 5-7% target by the end of FY25.
Key developments since the December meeting, likely to influence the MPC’s upcoming decision, include an increase in CPI inflation, a shift to a current account surplus in December 2023, a decrease in local fuel prices, stable international oil prices, and a stable Pakistani rupee against the US dollar. Furthermore, yields from the latest T-Bill auction have decreased, now positioned between 20.22% and 20.49%.
The International Monetary Fund’s (IMF) First Deputy Managing Director, Gita Gopinath, has cautioned central banks against rapid interest rate cuts, advising a careful approach to avoid market destabilization.
When asked about the expected Policy Rate in June 2024, 60% of survey participants predict a rate between 18-20%, indicating a shift in expectations from previous surveys. The rest of the participants are split, some anticipating higher rates and others lower.
Considering these factors, the consensus among market observers is that the SBP is likely to keep the policy rate unchanged at 22% in the upcoming MPC meeting, adhering to its strategy of cautious and measured responses to economic developments.
