The State Bank of Pakistan (SBP) is expected to further slash its key policy rate by at least 200 basis points (bps) in response to easing inflation and improving economic conditions, according to a survey conducted by Topline Securities.
The survey revealed that 71% of participants anticipate a minimum rate cut of 200bps in the upcoming Monetary Policy Committee (MPC) meeting, scheduled for December 16, 2024. Breaking down the expectations, 63% of respondents foresee a 200bps cut, 30% predict a reduction of 250bps, and 7% expect a cut exceeding 250bps. Meanwhile, 29% of participants believe the rate cut will range between 50-150bps.
In its previous meeting, the MPC implemented a historic 250bps reduction, bringing the policy rate down from 17.5% to 15%. This marked the most aggressive cut in the SBP’s history and the fourth consecutive rate reduction since the easing cycle began in June 2024.
Topline Securities attributed the expectations of another rate cut to persistently high real interest rates, which stood at 1010bps in November 2024—significantly above Pakistan’s historical average of 200-300bps. This is despite a cumulative 700bps reduction in the policy rate over the last four meetings.
The brokerage firm highlighted that the sharp decline in inflation has been a key driver of these expectations. November 2024’s inflation rate dropped to 4.9%, the lowest in 78 months, primarily due to food disinflation and negative electricity price adjustments under the Fuel Cost Adjustment (FCA) mechanism.
“We expect the SBP to announce a 200bps rate cut, which would bring the total reduction during this easing cycle to 900bps,” Topline Securities stated. This would mark the fifth consecutive rate cut since June 2024. However, even with a 200bps reduction, real interest rates would remain at 810bps, still significantly higher than the historical average.
Looking ahead, Topline projected that real interest rates would moderate further, based on average inflation estimates of 7-8% for FY25 and 8.5-9.5% for FY26. Following a 200bps cut, which would bring the policy rate to 13%, real rates are expected to settle between 400-550bps.
The Karachi Stock Exchange’s KSE-100 Index has also been buoyed by expectations of a significant rate cut, showing an upward trend since the recent protests in Islamabad concluded.
The MPC’s decision on December 16 will be closely watched as the SBP continues its efforts to balance economic growth with inflation control.
