Pakistan’s central bank is set to make a critical announcement on Tuesday as it unveils its next monetary policy statement. The domestic financial markets have undergone a notable shift in expectations, with a consensus now leaning towards maintaining the current benchmark policy rate at a record high of 22%. This marks a departure from earlier predictions, which suggested the possibility of a modest rate cut in December 2023.
The altered outlook precedes the awaited approval from the IMF executive board to disburse the next loan tranche amounting to $700 million to Pakistan, expected in January 2024. Initial projections had anticipated the board’s nod before the release of the December 2023 monetary policy statement.
The recent change in expectations is also a response to a surge in inflation, reaching 29.2% in November. The spike was triggered by a substantial increase in gas prices, up to 139% for different consumer categories. Inflation is projected to persist at around 30% in December 2023, sustaining its heightened status. The monthly inflation reading, measured through CPI, had reduced to 26.9% in October 2023.
Analysts, who were initially anticipating a token rate cut ranging from 25 to 100 basis points in December 2023, have now revised their forecasts. The updated expectations suggest a more significant slowdown in inflation from March 2024 onwards, rather than January 2024.
Financial experts now believe that the policy rate has peaked at 22%, and they anticipate a potential cut from March 2024 onwards. Projections indicate a seven-percentage-point reduction in the calendar year 2024, bringing the rate down to 15% by December 2024. Such a move is seen as providing crucial support to economic activities within the domestic economy.
Optimus Capital Management, Analyst, Maaz Azam remarked, “We anticipate a status quo policy rate due to persistently high inflation readings, unforeseen risks despite the positive 12-month forward RiR (Real Interest Rate) at 3%, and efforts to successfully complete the second review, with the IMF board meeting next month for SBA (Stand-by Arrangement) approval.”