As the Monetary Policy Committee convenes today to announce the new policy rate, speculations suggest that the State Bank of Pakistan (SBP) is expected to take a cautious stance on reducing the policy interest rate despite significant room for a cut due to declining inflation.
Expectations for the rate cut vary widely between financial experts and the trade and industry sectors. While businesses demand a reduction of 400 to 500 basis points (bps) to spur economic growth, financial analysts predict a more conservative cut of 200 to 300 bps.
The headline inflation rate measured by the Consumer Price Index fell sharply to 4.9 per cent in November, leaving the real interest rate at a highly positive 10pc, as the current policy rate is 15pc.
Although this creates substantial room for rate cuts, the SBP is unlikely to lower the policy rate to single digits in one go, as demanded by trade and industry representatives.
Amid anticipations of a rate cut, shares continued their upwards trajectory at Pakistan Stock Exchange (PSX) as the benchmark KSE-100 index climbed 2107.13 points, or 1.84pc, to stand at 116,408.93 points from the previous close of 114,301.80 at 2:30pm.
The central bank has brought down the interest rate to 15pc from an unprecedented 22pc in four intervals since June, but it was unable to chase the steep fall in the Consumer Price Index, which hit a 78-month low of 4.9pc in November. The government and the market experts expected the CPI-based inflation to range from 6 to 8pc.
Some experts said it looks good, but the steep fall of CPI also indicates lower economic activities, particularly when the government and international donor agencies estimate the economic growth in the range of 2.5 to 3pc in FY25.
Financial experts also warn that drastically lowering the policy rate to single digits — would destabilise the banking system and could reignite inflation.
Analysts and researchers in their reports have estimated that December inflation would further decline to 3.5pc to 3.9pc, thus creating further room for an interest rate cut. However, the finance minister recently hinted that the reduction may not exceed 300 bps.
