Finance Minister Aurangzeb hopes for interest rate cut this year

Finance Minister Muhammad Aurangzeb expressed hope for a key policy rate cut this year by the State Bank of Pakistan (SBP) in “line with inflation” on Wednesday.

The comments come as a Reuters poll of market watchers found that the SBP is widely expected to cut its key interest rate next week by 100 basis points (bps) after holding it at a record 22pc for seven straight policy meetings.

Speaking at the Pak-China Business Forum in Shenzhen, the finance minister highlighted that the country’s foreign exchange had been stable “both on the back of administrative measures” and structural changes.

He also noted that inflationary pressure had slowed to just above 11 per cent, beating the market consensus of 14pc.

While admitting that the policy rate was in the domain of the central bank, Aurangzeb said: “We do expect that the policy rate will start moving down in line with inflation because we have now enough cushion in terms of the positive real interest rate that we need to maintain.”

“Now markets have reacted positively, we have seen foreign buying coming into the stock exchange; equally we have seen fixed income institutional flows come back into Pakistan,” he said, adding that this showed signs of confidence developing in the economy of the country.

The minister also spoke about “three key aspects” which he called the “road to market” strategy, which the country aimed to move toward: export-led growth, foreign direct investment (FDI) and access to international capital markets.

In terms of accessing international capital markets, the finance minister emphasised that they were very keen on “accessing the Chinese capital markets” and were in the preparatory stages for Pakistan’s inaugural panda bond issue which has previously never been done before, adding that they “are going to be in touch with the regulatory authorities here in China because this is going to follow a structure which the government of Egypt followed last year”.

He had previously said that Pakistan would like to raise $300 million in Panda bonds by tapping the Chinese bond market as and when the country’s credit rating improved.

Over 100 businessmen and companies from Pakistan were part of the delegation, seeking business opportunities days ahead of the annual budget.

Regarding the foreign reserves, Aurangzeb said that the number stood over “9 billion dollars which is close to import cover of two months”, adding that it was important to mentioned “not only the quantum of FX reserves but also the quality of FX reserves. These reserves have not been built on the back of debt stock”.

SBP expected to cut rates by 100 bps

The SBP is widely expected to cut its key interest rate next week by 100 basis points (bps) after holding it at a record 22pc for seven straight policy meetings, according to a Reuters poll of market watchers.

Previously, a Dawn report said that experts anticipate the State Bank would be again cautious as the policy would be announced without getting input from budgetary measures and talks with the International Monetary Fund (IMF) for another loan.

The central bank will meet on Monday, a week after Pakistan posted its lowest consumer price index (CPI) reading in 30 months at 11.8pc in May — lower than most projections.

The decision will come days before Pakistan’s annual budget. The median estimate in a Reuters poll of 16 analysts predicts the SBP will cut rates by 100bps.

Ten analysts are forecasting a 100 bps cut, one analyst expects a 150 bps cut, four expect a 200 bps cut. One respondent expected the bank to hold rates again.

Economic activity has been slow in Pakistan for the last two years as it implemented tough reforms under an IMF bailout in a bid to stabilise its crashing economy.

GDP growth was expected to be at 2pc in the current financial year, which ends in June, and was negative in the previous year. The government says it will target 3.5pc this year as it expects an uptick in economic activity.

The government will formally approach the IMF for a new longer term bailout this summer after completing a short term programme earlier this year that helped it avoid a default. The lender had previously stressed the importance of keeping a tight monetary policy to control inflation, which remained above 20pc since May 2022 and hit a record high last year at 38pc.

Inflation has since slowed, and came in at below 20pc in April and 11.8pc in May.

“Given the sustained decline in inflation and the fact that SBP showed prudence by not prematurely cutting rates, it now has the space to cut without risking things with the IMF,” said Uzair Yonus, an economic analyst.

However, Fawad Basir, Head of Research at KTrade, said tax reforms being considered in the budget may have a far reaching impact on the economy and not just inflation. “Once the impact of such decisions is evident in the high frequency data sets, followed by successful negotiation with the IMF, then the SBP will be in a good position to start the dovish stance possibly coinciding with US FED strategy.”