SBP Expected to Cut Interest Rate by 200 Basis Points in November: Report

Pakistan’s Consumer Price Index (CPI) for October 2024 is projected to be between 6.5% and 7.0% year-on-year, with a month-on-month increase of 0.9%. This would bring the average for the first four months of FY25 to approximately 8.6%, a significant decline from 28% during the same period last year.

According to a report from Topline Securities, food inflation in October is expected to rise by 0.7% month-on-month, primarily driven by increases in wheat and chicken prices.

In terms of the interest rate outlook, the State Bank of Pakistan (SBP) is scheduled to hold its monetary policy meeting on November 4, 2024. The report anticipates a fourth consecutive interest rate cut of 200 basis points, reducing the current rate of 17.5% to between 15.5% and 16.5%. This move would mark a total reduction of 650 basis points over the past 4-5 months, with projections suggesting the policy rate could further decrease to 13-14% by June 2025.

Real interest rates are expected to surge to between 1050 and 1100 basis points, significantly surpassing Pakistan’s historical average of 200-300 basis points, given the anticipated inflation of approximately 6.5-7.0% for October 2024.

The housing, water, electricity, and gas sectors are expected to see an approximate 3% month-on-month growth, driven by expected rent increases of 2-2.5% and a tariff hike from Rs. 7.7/kWh to Rs. 11.69/kWh for protected consumers following the expiration of a three-month subsidy on power consumption by the Prime Minister.

Conversely, the transport segment is projected to decline by 2.3% month-on-month, influenced by decreases in petrol and diesel prices.

The inflation outlook has been revised downward, with the average inflation forecast for FY25 now expected to range from 7% to 8%. This revision is attributed to a faster-than-anticipated disinflation in the food sector earlier in the year, despite recent increases in wheat prices and negative fuel cost adjustments.

The International Monetary Fund (IMF) has also adjusted its average inflation forecast for FY25 to 9.5%, down from 12.7% previously reported. The central bank has noted that the average inflation for FY25 will likely fall below the earlier forecast range of 11.5% to 13.5%.

Key Risks: Significant deviations in commodity prices, particularly oil prices around $75 per barrel, may lead to adjustments in inflation estimates.