SBP Likely to Cut Policy Rates by 200bps in December Meeting

SBP Expected to Slash Policy Rates by 200bps in Upcoming Meeting: Survey Insights

The State Bank of Pakistan (SBP) is set to convene its Monetary Policy Committee (MPC) meeting on December 16, 2024, and market participants anticipate another significant rate cut. According to a recent poll conducted by Topline Securities, 71% of respondents predict a minimum cut of 200 basis points (bps), reflecting expectations of continued easing in monetary policy.

Survey Highlights

• Expected Rate Cuts:
  • 63% of respondents anticipate a 200bps cut.
  • 30% predict a 250bps reduction.
  • 7% expect a more aggressive cut exceeding 250bps.

Among the remaining 29% who foresee a smaller reduction:

• 69% predict a 150bps cut.
• The rest expect cuts ranging from 50 to 100bps.

Driving Factors Behind the Rate Cut

The anticipation of a rate cut is driven by historically high real interest rates of 1010bps in November 2024, compared to the long-term average of 200-300bps. This follows a cumulative 700bps reduction in policy rates during the last four consecutive MPC meetings since June 2024.

The sharp decline in YoY inflation, which reached a 78-month low of 4.9% in November 2024, has bolstered expectations. Falling food prices and negative electricity price adjustments (FCA) have been key contributors to this trend.

Projected Impact of a 200bps Cut of SBP Policy Rates

If SBP announces a 200bps rate cut, it would mark the fifth consecutive reduction in the current easing cycle, bringing the total cuts to 900bps and the policy rate to 13%. Despite this, real rates would remain at 810bps—well above Pakistan’s historical norm.

Forward-looking inflation estimates for FY25 (7-8%) and FY26 (8.5-9.5%) suggest that real rates post-cut would still range between 400-550bps. This cushion is expected to help absorb potential external shocks or fiscal adjustments, ensuring monetary stability in the medium term.

Trends in Market Rates

The easing inflation outlook has already affected market instruments:

• The 6-month KIBOR has dropped by 74bps since the last MPC meeting on November 4, 2024.
• 6-month Treasury bill rates have declined by 81bps, currently standing at 12.59% and 12.16%, respectively.

Inflation and Interest Rate Outlook

The survey highlights improved inflation expectations:

• 59% of participants now project inflation to stay below 8% for FY25, up from 28% in earlier surveys.
• For FY26, inflation is forecasted between 8.5-9.5%.

On interest rates, 59% of participants expect rates to fall between 10-12% by June 2025. This is a notable shift from previous surveys, where only 34% had similar expectations. Overall, 70% now foresee rates below 12% by mid-2025, compared to just 38% earlier.

Conclusion

If the SBP implements the widely expected 200bps cut, it will further cement its commitment to easing monetary policy while maintaining positive real interest rates to safeguard against potential shocks. With inflation cooling and market rates trending downwards, Pakistan’s economic outlook continues to strengthen, supported by this monetary recalibration.