Market eyes 50-100bps rate cut on May 5

As the State Bank of Pakistan (SBP) gears up for its Monetary Policy Committee (MPC) meeting on May 5, 2025, expectations are leaning toward a possible policy rate cut, although sentiment remains divided. A growing segment of analysts and institutional investors anticipates a measured 50 to 100 basis points (bps) reduction, driven largely by record-low inflation and improvements in the country's external account.

Arif Habib Limited (AHL) predicts a measured 50bps cut, which would lower the policy rate to 11.5%. This projection is based on a recent AHL survey covering financial and non-financial sectors — including banks, asset management companies, insurers, development finance institutions, and representatives from the Exploration and Production, cement, fertiliser, steel, textile, and pharmaceutical industries. According to the survey, 54.6% of respondents expect a rate cut: 36.4% foresee a 100bps reduction and 18.2% anticipate a 50bps decrease. On the other hand, 45.4% believe the central bank will maintain the current 12% policy rate.

A separate survey by JS Global, targeting high-net-worth individuals and financial institutions, presents a more conservative outlook. A majority—56%—expect the SBP to keep rates unchanged. Meanwhile, 31% foresee a 100bps cut, and 13% project a 50bps reduction. Notably, no respondents expect a 75bps adjustment.

The primary argument for easing stems from the dramatic fall in inflation. Headline inflation plunged to a six-decade low of 0.7% in March 2025 and is projected to decline further to 0.45% in April. This sharp drop has pushed the real interest rate to approximately 11.3%, creating substantial room for monetary easing. Average headline inflation for the first 10 months of FY25 is estimated at 4.88%, a sharp contrast to 26.22% during the same period last year. The decline has been attributed mainly to base effects and softened food prices.

However, some caution is warranted. These base effects are expected to fade in the coming months, potentially nudging inflation upward. Moreover, core inflation (non-food, non-energy or NFNE) remains sticky, estimated at 7.72% year-on-year for April, with a 10MFY25 average of 10.05%.

On the external front, the country posted a current account surplus of $1.86 billion in 9MFY25, reversing a $1.65 billion deficit in the same period last year. This turnaround was largely driven by a 33% year-on-year rise in remittances, which reached $28 billion. While the improvement has strengthened the external account, a simultaneous 11% increase in imports — reaching $40.4 billion — signals a revival in domestic demand. Though encouraging from a growth perspective, this trend could reintroduce pressure on the current account and the rupee, warranting a cautious approach by policymakers.

Industrial activity, as measured by Large-Scale Manufacturing Industries (LSMI), remains subdued. LSM output declined by 3.5% year-on-year in February 2025 and contracted by 5.9% month-on-month. For the 8MFY25 period, LSM output was down 1.9%, underscoring persistent weakness across major sectors and reinforcing the case for a supportive monetary stance to spur growth.

In the money market, signals are mixed. Long-tenor yields have declined—3-year and 5-year papers dropped by 35bps and 26bps respectively—reflecting expectations of a rate cut. In contrast, shorter-term yields have edged up, with 3-month, 6-month, and 12-month rates rising by 7bps, 14bps, and 18bps, respectively. Looking ahead, JS Global's survey also gauged expectations for the policy rate's floor in calendar year 2025. About 49% of respondents expect the rate to decline to 10%, indicating a strong consensus in favour of further monetary easing. Additionally, 20% of those surveyed believe the rate could fall below 10%, while 25% anticipate a bottoming out at 11%. Only 5% think the rate will remain at its current level of 12%, underscoring widespread expectations of a downward trend in interest rates.

These results reflect growing market sentiment that disinflationary pressures and macroeconomic stability may pave the way for a more accommodative monetary stance in the near term.