SBP Likely to Slash Policy Rate by Another 200 BPS This Month: Survey

The State Bank of Pakistan (SBP) is scheduled to hold its Monetary Policy Committee (MPC) meeting on December 16, 2024. In a poll conducted by Topline Securities, 71 percent of the participants expected that the central bank would announce a minimum rate cut of 200bps. Out of the 71 percent, 63 percent expect the interest rate to be cut by 200bps, 30 percent expect a cut of 250bps, and 7 percent anticipate a cut of more than 250bps. While the remaining 29 percent expect a rate cut between 50-150bps, within this, 69 percent believe the rate cut would be 150bps. In our view, participants are expecting a rate cut due to high real rates of 1010bps in November 2024 compared to a historic average of 200-300bps despite a 700bps cut in total interest rates in the last four consecutive meetings since June 2024. Real rates are high as the monthly inflation reading for November 2024 has touched a 78-month low of 4.9 percent. The significant fall in YoY inflation in the last few months is on the back of faster food disinflation and negative electricity price adjustments (FCA). SBP will announce a rate cut of 200bps, taking the total cut to 900bps. This will be 5th consecutive cut of this cycle. Post this rate cut of 200bps, real interest rates will remain at 810bps, still higher than Pakistan’s historic average of 200-300bps. However, based on average inflation of 7-8 percent for FY25 and 8.5-9.5 percent for FY26, real rates after this 200 rate cut (policy rate 13 percent) would be 400-550bps. Sufficient Real rates required to accommodate any external or budgetary shock: In order to absorb any mini budget impact and external shock, the Central bank will continue to keep a positive real rate in the range of 300-400bps in medium terms over forward-looking inflation. 6M KIBOR and 6 Months T-Bills are down 74-81 bps from last MPC meeting: Led by falling inflation expectations, the 6M KIBOR and Treasury bills rate are down 74-81bps since the last monetary policy meeting on November 04, 2024, and currently hovering at 12.59 percent and 12.16 percent, respectively. 59 percent of the participants are expecting inflation below 8 percent in FY25. Topline Research conducted a poll of key market participants on expectations over policy rate, and average inflation for FY25. According to survey results, 71 percent of the participants expect that the central bank will announce a minimum rate cut of 200bps. Of the total 100 percent of participants, 45 percent of the participants expect a 200bps cut, 21 percent expect a 250bps cut, and 5 percent expect a decline of more than 250bps. While 20 percent expect a 150bps cut, 7 percent expect a 100bps cut, and 2 percent expect a 50bps cut. On the inflation side, 59 percent of participants now expect inflation below 8 percent for FY25 vs. the earlier 28 percent. Expectations for lower inflation are due to negative fuel cost adjustments and lower food prices. The report forecasts inflation to average between 7-8 percent for FY25 and 8.5-9.5 percent for FY26. On the June 2025 interest rate target, 59 percent of participants are expecting interest rates to clock in at 10-12 percent, compared to 34 percent in the previous survey. In total, 70 percent now expect interest rates below 12 percent compared to 38 percent earlier.