Pakistan’s central bank will likely cut its key interest rate again on Monday in its first policy meeting following the signing of a staff level agreement with the International Monetary Fund and a new state budget, analysts said.
Pakistan and the IMF reached an agreement for the 37-month loan program this month. Tough measures such as raising tax on agricultural incomes and lifting electricity prices have prompted concern among poor and middle class Pakistanis grappling with rising inflation and the prospect of higher taxes.
In June, Pakistan’s central bank cut its key interest rate by 150 bps from an all time high of 22%, in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.
However, inflation has slowed down. Pakistan’s consumer price index (CPI) in May rose 11.8% from a year earlier, giving the central bank room to cut, analysts say.
Only one analyst out of 14 predicted that rates would be held at 20.5%; the rest forecast a central bank cut. Seven analysts said they expected a 100 basis-points cut, five a 150 bps cut, while one analyst anticipated a 200 bps cut.
“An inflationary spike following the budget has not materialised as feared,” said Mustafa Pasha, chief investment officer at Lakson Investments.
In June, the central bank warned of possible inflationary effects from the budget, saying limited progress in structural reforms to broaden the tax base meant increased revenue must come from hiking taxes.
The South Asian country set a challenging tax revenue target of Rs13 trillion ($47 billion) for the ongoing fiscal year that started July 1, a near-40% jump from the previous year, and a sharp drop in its fiscal deficit to 5.9% of GDP from 7.4% for the previous year, to secure key funding from the IMF.
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Pasha added that clarity on the IMF programme, stability in the currency markets, and stable foreign inflows trickling into domestic debt and equities, provide “ample comfort to the SBP in continuing to ease the policy rate in July and beyond”.
However, Muhammad Ali, senior investment analyst at AKD securities said that the State Bank of Pakistan is likely to hold rates because it still needs to gauge food inflation for the next several months.
“Food commodities [eg wheat] have significant upside potential,” he said, adding that cuts of 150-200 bps each are possible in September and December policy meetings.
