State Bank expected to remain cautious over policy rate

KARACHI: The State Bank’s monetary policy meeting, scheduled for June 10, has received more attention from the stakeholders, as the policy would be announced without getting input from budgetary measures and talks with the IMF for another loan.

The government seems willing to provide relief to the common people and some measures in this context could be inflationary.

Therefore, some experts said the State Bank would be again cautious despite room for a significant rate cut due to a large difference between the headline consumer inflation of 11.8 per cent and the existing policy rate of 22pc.

In a survey conducted by Topline Securities, some 90pc of participants expected a rate cut, but they differed over the extent of the reduction, with estimates ranging from 100 to 300 basis points.

Survey shows 90pc participants think cut is likely, but differ over extent of reduction

The secondary market has already started reflecting the possible change in the interest rate, with both the Karachi Interbank Offered Rate (Kibor) and yields on government papers falling over the past two days.

The return on three-month government papers dropped by 19bps to 20.18 per cent. In a month, the yield has dropped by 142bps. The yield on benchmark six-month papers fell by 9bps to 20.50pc and by 80bps in a month. The yield in one-year tenor dropped by 9bps to 19.60pc. In a month, the return on this paper has dropped by 125bps.

Meanwhile, the six-month Kibor has fallen by 3.8 percentage points from its peak of 24.71pc on September 13 2023.

SBP ‘in dark’

Financial experts said the State Bank is in the dark over budgetary measures, which might compel it to remain within a manageable interest rate policy despite a 10.2pc higher real interest rate.

Surveys, research and comments by financial experts were sure about a cut in the interest rate, but the speculations were significantly different.

Mohammad Sohail, CEO of Topline Securities, said the State Bank governor, in a previous briefing at the time of the monetary policy announcement, said that the SBP would watch the budgetary developments and the IMF programme. Now, the SBP would have to skip both observations.

The budget is expected on June 12.

Sohail expects the policy rate to decline by 600-700bps by June 2025 to 15-16pc, with real interest assumption of 300-400bps “as we expect inflation to average 13pc to 13.5pc” in the next fiscal year (2024-25).

Tahir Abbas, head of research at Arif Habib Ltd, expects the SBP to start easing the monetary cycle by reducing the policy rate by 200bps.

Topline poll

Topline Research conducted a poll of key market participants on expectations for the policy rate, IMF programme, and rupee depreciation for the next fiscal year.

According to the results, 88pc of participants believed that the SBP would announce a rate cut compared to 49pc of respondents who believed so in a survey conducted ahead of the last Monetary Policy Committee (MPC) meeting.

Of them, 34pc believed that the rate cut would be in the range of 200 to 300bps compared to zero per cent in the last survey. Besides, 43pc expected a rate cut of 100bps, similar to the previous survey.

Furthermore, 49pc of the investors now expect the policy rate to come down to 16pc to 18pc by December compared to 41pc respondents earlier. This is primarily due to a higher-than-expected fall in the May inflation reading.

In a question related to currency depreciation, 41pc expected the rupee to depreciate by 2pc to 6pc per year, while 38pc saw a depreciation of 6pc to 8pc.

Besides, 62pc participants believed that the IMF would announce the staff-level agreement (SLA) with Pakistan in July, while 30pc expected it to happen after August.