Pakistan Economy – SBP reduced policy rate by 200bps.
ISLAMABAD: Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) has announced rate cut of 200bps, higher than market expectations of 150bps in MPC meeting held today. Post this decision, central bank also hosted analyst briefing session.
After this rate cut, interest rates now stand at 17.5%, lowest level in last 20 months, seen previously in Jan 2023.
This is the third consecutive rate cut announced by central bank in response to receding inflation readings in past few months due to high base effect, falling food prices and comfortable external position. Inflation in Aug 2024 clocked in at 9.64%, turning in single digit after 34 months.
SBP in its press release has noted that, the pace of disinflation has exceeded committee’s earlier expectations due to delay in implementation of planned increases in administered energy prices and favorable movement in global oil and food prices.
Real Rate: Post this rate cut, real rates now stands at 786bps, still higher than historic average of 200-300bps. To note, governor in briefing has mentioned that, there is no specific number of real rate which central bank is chasing, monetary policy decision is function of multiple factors that includes inflation, external accounts and other indicators.
Release of new datasets: Governor in analyst briefing session informed that, central bank will now release 3 new datasets considering the request of various participants and their repeated inquiries. These datasets will include (1) SBP market intervention data in FX market, (2) SBP reserves forecast, and (3) External debt repayments numbers for next six months.
SBP market intervention: Central bank purchased US$573mn dollars from market in month of Jun 2024. This dataset will be released monthly with lag of every 3 months.
SBP reserves forecast: SBP forecasts that, by Mar 2025, SBP reserves will achieve US$12bn mark. Previously Governor has also stated that, reserves target for Jun 2025 is US$13bn. This dataset will be released semi annually.
External Debt Repayment till Mar 2025: As per SBP, till Mar 2025, debt repayment stands at US$14.1bn out of this US$8.3bn would be rolled over/refinanced and US$5.8bn will be paid. Up till Sep 12, 2024, SBP has repaid US$4bn which includes US$2.3bn rollover and net payment of US$1.7bn.
Inflation will fall below the earlier disclosed range of 11.5-13.5% in FY25
Macroeconomic indicators forecast:
Current account: SBP forecasts current account deficit of 0-1% of GDP in FY25.
Inflation: SBP believes that, FY25 average inflation will fall below the earlier disclosed range of 11.5-13.5%.
GDP growth: GDP growth rates stands same at 2.5-3.5% for FY25.
Other key takeaways
Central bank will soon transfer dividend of over Rs2.5tn to government from its FY24 profits.
Government has arranged US$2bn of external financing and now all external financing amount commitments required for IMF program is arranged by the Government. This should pave the way for IMF board approval in Sep 2024.
External repayments are evenly scattered in next six months, there is no lumpy payment schedule ahead apart from rollover amount.
Central bank now aims to achieve sustainable growth of the economy without compromising external account stability.
Remittances momentum should continue due to lower spread between formal and informal market.
Impact on Market:
Interest rate cut is positive for high leverage, cyclical and consumer discretionary companies. The leverage companies will benefit from lower finance cost, cyclicals will benefit from recovery of economy and consumer discretionary companies like autos will benefit from expected rise in consumer financing.
Sector wise, textile sector should stand beneficiary due to high leverage with positive impact of 7-10%, Steels 5-6%, and cement sector 4-6%. While, banks are expected to see decline of 7-10% in earnings due to narrowing spreads. To note, 6M KIBOR already fell to 17.67% in anticipation of rate cut. We expect KSE 100 Index to reach 106,000 by Jun 2025, offering return of 34%.
