Though there is a lot of leeway for a decrease given the dropping inflation, the State Bank of Pakistan (SBP) is anticipated to adopt a cautious approach when lowering the policy interest rate when the Monetary Policy Committee meets today to announce the new policy rate.
The commerce and industry sectors and financial specialists have somewhat different expectations for the rate cut. Financial analysts forecast a more cautious drop of 200 to 300 basis points (bps), while companies call for a 400 to 500 bps reduction to promote economic development.
The Consumer Price Index’s headline inflation rate dropped precipitously to 4.9% in November, which left the real interest rate at a very favorable 10 percent, given that the policy rate is at 15 percent.
The SBP is unlikely to decrease the policy rate to single digits all at once, as urged by trade and industry leaders, even if this leaves a lot of room for rate cuts.
Shares at the Pakistan Stock Exchange (PSX) continued to rise amid expectations of a rate drop, as the benchmark KSE-100 index increased 2107.13 points, or 1.84 percent, to end at 116,408.93 points from the previous closing of 114,301.80 at 2:30 pm.
The central bank was unable to stop the sharp decline in the Consumer Price Index, which fell to a 78-month low of 4.9 percent in November, even though it had lowered the interest rate to 15 percent from an unprecedented 22 percent in four intervals since June. The CPI-based inflation rate was predicted by the government and market analysts to be between 6 and 8 percent.
According to some analysts, it appears promising, but the sharp decline in the CPI also points to a decline in economic activity, especially given that the government and foreign donor organizations predict 2.5–3% economic growth in FY25.
A sharp reduction in the policy rate to single digits, according to financial analysts, would cause the banking system to become unstable and would even spark inflation again.
In their studies, analysts and researchers predicted that December inflation would drop even further, to between 3.5 and 3.9 percent, which would free up more space for an interest rate reduction. The finance minister did, however, lately imply that the cut might not go above 300 basis points.
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