SBP likely to cut policy rate again

In its upcoming monetary policy meeting scheduled for Friday, September 12, Pakistan's central bank is widely anticipated to make a third consecutive cut in its key policy rate. The reduction, expected to be in the range of 1% to 1.5%, follows a decline in inflation to single digits in August and aims to support economic activity in the fiscal year 2024-25. There is potential for a larger cut given the significant gap between the State Bank of Pakistan's (SBP) current policy rate and the latest inflation reading, which results in a real interest rate of 10-11%. Historically, Pakistan has maintained an average real interest rate of 3-5% to protect against unexpected inflation surges. Saad Hanif, Head of Research at Ismail Iqbal Securities, believes the SBP will take a cautious approach, opting for gradual rather than aggressive cuts. He notes two primary reasons for this: first, the bank's desire to maintain a tight monetary policy in line with the International Monetary Fund (IMF) recommendations as Pakistan seeks a $7 billion loan programme, expected in September. Second, a larger rate cut could lead to an unwanted depletion of foreign exchange reserves, potentially weakening the rupee, which has remained stable at Rs278-279/$ for over five months.