Real interest rate turns positive

Stands at 1.32%, prompts calls for cut in SBP’s key monetary policy rate

KARACHI:

Pakistan’s real interest rate – the current interest rate minus the inflation reading – has entered positive territory on a spot basis after a gap of 37 months on Monday, increasing the probability that the central bank will make the first cut in its policy rate in the next monetary policy scheduled for late April 2024.

The real interest rate turned positive by 1.32% after the inflation reading slowed down to 20.68% in March, falling below the interest rate that stood at 22% since late June 2023.

The last time the real interest rate was positive was in January 2021 when it stood at 1.35%, Arif Habib Limited (AHL) reported on Monday.

With inflation showing a downward trend, the likelihood of a widening real positive interest rate in the future increases, “prompting calls for interest rate cuts,” the research house said.

Earlier, the central bank jacked up its benchmark policy rate (interest rate) cumulatively by 15% straightaway in the past three years (September 2021 to June 2023), taking it to the current high level at 22% from the then-low at 7% by September 2021.

The financial markets are expecting the State Bank of Pakistan (SBP) to make the first rate cut for the past couple of months, which is a must to provide bank financing at an affordable price to the private sector to gear up industrial output and ramp up economic activities.

The central bank, however, took moves against market expectations despite the real interest rate having turned positive on a 12-month forward-looking basis for the past few months, standing at a positive 5-6%, as the market views the inflation reading decelerating to 16-17% by December 2024.

The market viewed the bank maintaining the rate at a record high on the guidelines provided by the International Monetary Fund (IMF) for maintaining tight monetary policy under the ongoing $3 billion loan programme.

It would be interesting to note whether the bank cuts the interest rate on April 29, 2024, considering Pakistan has initiated negotiations to acquire a new loan programme by the end of June 2024.

SBP Governor Jameel Ahmad said in late January 2024 that the government’s decision to increase gas prices for the first time in November 2023 spiked inflation readings beyond the central bank’s expectations. This prompted it to maintain the status quo on the interest rate to tame inflation, going forward.

Later, in February 2024, the government further increased gas prices for the second time in the ongoing fiscal year 2024, leading the central bank to leave the interest rate unchanged until inflation falls to a level under control.

Finance Minister Muhammad Aurangzeb, however, remarked late last week that inflation is showing a downward trend. This should be followed by an interest rate cut soon.

Alpha Beta Core CEO Khurrm Schehzad said in the commentary that as far as the policy rate easing goes, though inflation is gradually receding (but largely due to the high base-effect of last year), not at the pace as expected earlier and rural core inflation as well as general CPI still hovering in the 20s, “it will take some more months before one should expect monetary easing from monetary authorities.”

Apart from inflation figures, many factors would matter in any significant rate change decision by the monetary authorities at home, including the currency parity and outlook, dollar flows, global interest rate scenario, IMF’s new programme, and the detailed action plan by the fiscal authorities in this regard. However, with March 24 figures, monthly inflation is now contained within the policy rate range, with real rates turning positive in the 2% range. “If sustained ahead, this should reignite hopes for gradual easing in the quarters to come.”

Published in The Express Tribune, April 2^nd, 2024.

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