Economists and analysts are eyeing a possible interest rate cut of up to 200 basis points following a significant drop in inflation figures for August. The Consumer Price Index (CPI), the primary measure of inflation, fell from 11.1 per cent in July to 9.6 per cent in August, creating an opportunity for the State Bank of Pakistan (SBP) to consider lowering interest rates to align with the demands of economic stakeholders.
Despite the SBP’s previous 100 basis points cut in the interest rate to 19.5 percent during the July 29 monetary policy meeting, many in the trade and industrial sectors believe that this reduction is insufficient to effectively stimulate the economy. There is a call for the interest rates to be lowered to around 14 per cent, as the high rates pose a significant obstacle to private-sector borrowing due to the associated costs.
With the next monetary policy meeting scheduled for the 12th, expectations are high for a potential reduction of up to 200 basis points. Observations by economists regarding the secondary market yields on three-month treasury bills, which currently stand at around 18 percent, indicate that the market is anticipating a minimum rate cut of about 1.5 percentage points.
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While the current trend of low inflation is seen as positive, economists caution that sustaining this trend would require a long-term agreement with the International Monetary Fund (IMF), bolstering foreign exchange reserves, and maintaining fiscal discipline. Pakistan’s discussions for a 37-month loan agreement with the IMF worth $7 billion have been affected by struggles to enhance foreign exchange reserves prior to finalizing the deal.
Additionally, researchers have highlighted geopolitical tensions, such as the conflict in Palestine, the war in Ukraine, and escalating tensions with Iran, which could lead to higher oil prices and potentially increase inflationary pressures due to the elevated cost of petroleum products.
Independent economists warn that a cautious approach may fall short of boosting economic growth. With the GDP growth expected to remain between 2.5 per cent and 3.5 per cent, concerns arise regarding the ability to create enough jobs for the hundreds of thousands of young Pakistanis currently seeking opportunities abroad.
