Brokerage House Expects Further Cut in Policy Rate Next Week

The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on September 12, with brokerage house Arif Habib Limited (AHL) expecting a 150bps cut in policy rate. The 150bps cut would bring the policy rate down to 18 percent, a level last seen in February 2023, when it had dropped to 17 percent. AHL highlighted in its report that this would mark the third consecutive rate cut since the commencement of the interest rate reversal cycle in June 2024. The brokerage house said key recent improvements in macroeconomic indicators that support its expectation of a rate cut include: The main factor supporting an anticipated rate cut is the significant decline in inflation. In August 2024, inflation fell to a single digit of 9.6 percent, resulting in a real interest rate of 1,000bps, which creates room for further rate cut. Additionally, both headline and core inflation rates in Pakistan have decreased. For the 2MFY25, the average inflation rate is 10.4 percent, a substantial drop from 27.8 percent in the same period of FY24. Furthermore, on the external front, the current account deficit with the beginning of FY25 has substantially decreased to $162 million in July 2025. This represents a significant improvement compared to the $741 million deficit recorded in the same period last year. The reduction in the deficit is largely attributed to a 48 percent YoY increase in remittances. This significant reduction has contributed to the stability of the PKR against the US dollar. Additionally, the Large Scale Manufacturing Index (LSMI) has shown slightly improved performance. For FY24, LSMI reported a 0.94 percent YoY increase in production, with positive growth observed in ten sectors, including food, coke, and petroleum products, wearing apparel, and pharmaceuticals. In addition to the improvement in the current account and parity, the SBP reserves have also seen a substantial increase. SBP reserves have risen to $9.4 billion, up from $7.6 billion a year earlier. This boost in reserves allows the central bank to lower interest rates with reduced risk of destabilizing the currency or draining reserves. Lastly, Pakistan finalized a staff-level agreement with the IMF in July 2024 which is anticipated to receive executive board approval soon. The IMF highlights a commitment to fostering disinflation, which supports our expectation of continued monetary easing. Hence, a reduction would be consistent with the IMF’s policy stance and would further support the ongoing efforts to stabilize the economy and foster growth. The brokerage house further said that since the last monetary policy announcement in July 2024, yields for short- term government securities have declined in both primary and secondary markets. In the primary market, yields for the 3-month, 6-month, and 12-month tenors declined by 1.49 percent, 1.01 percent, and 0.74 percent, respectively. On the other hand, the secondary market saw an even more pronounced decline across various tenors, with the 3-month, 6-month, and 12-month yields falling by 1.52 percent, 1.60 percent, and 1.28 percent, respectively. Longer-term yields also dropped, with the 3-year down by 1.10 percent, the 5-year by 0.59 percent, and the 10-year by 0.72 percent. This shows that the market is also anticipating further monetary easing, as reflected in the more substantial yield declines across both short- and long-term tenors in both the markets, AHL said.