Pakistan likely to make first cut in benchmark interest rate this month

Cite low inflation reading, reduction in profit rate on debt securities

KARACHI: In line with the global trend, Pakistan is likely to make the first cut in benchmark interest rate sooner rather than later to let economic activities gain pace following a much lower-than-expected inflation reading for February and a notable reduction in the rate of profit on government debt securities.

“We expect the State Bank of Pakistan (SBP) to make the first rate cut of 25-50 basis points in its monetary policy statement this month (March),” Arif Habib Limited Head of Research Samiullah Tariq said while talking to The Express Tribune.

At present, the policy rate stands at an eight-year high of 13.25% since July 2019. Earlier, the central bank jacked up the rate by a hefty 7.5 percentage points from January 2018 to July 2019. Although Topline Securities’ Research Director Syed Atif Zafar anticipated the rate cut in March but he was sure of a reduction by May 2020. “We foresee the first rate cut of 50-100 basis points by May,” he said.

Earlier, several research houses anticipated the first rate reduction in July or later in the wake of unexpectedly high inflation that hit a nine-year high at 14.6% against expectation of around 13.5% in January 2020. In February 2020, the inflation rate once again beat market expectations but this time it stood lower at 12.4%, which was contrary to market anticipation.

“The inflation number will fall to around 10.5% in March. This may force the central bank to make the rate cut sooner rather than later,” Zafar said. Tariq anticipated the inflation reading to touch 10% in March.

A major support will come from the reduction in petroleum product prices by Rs5-7 per litre for March. Besides, food prices have also softened in recent days and weeks. “This will build up the case for the rate cut,” Zafar said.

In addition to these, commercial banks lent Rs110 billion to the government at comparatively lower rates of return on Wednesday. “This development also suggested a rate cut in the near future,” he said.

Banks lent money to the government by participating in the auction of long-term (3 to 20-year) Pakistan Investment Bonds (PIBs). The cut-off yield on 3 to 10-year PIBs dropped 15-46 basis points in the auction.

Previously, the central bank increased the interest rate to contain inflation. This, on the other hand, made financing expensive for businesses and resulted in an economic slowdown.

Published in The Express Tribune, March 5^th, 2020.

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