A 100bps cut expected in Jun’24 MPC as inflation gives breathing room

SBP Rate Setting Committee Meeting

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) is scheduled to meet on June 10, 2024. The main agenda is to decide on the policy rate for the next two months. It is anticipated that the MPC will opt for a dovish rate cut of 100 basis points (bps), reducing the policy rate to 20%. This forecast is based on the recent month-on-month decrease in inflation.

Shift in MPC focus

The focus of the MPC may shift from solely controlling inflation to striking a balance between providing room for economic growth and managing inflation within the SBP’s target range.

CPI vs. Interest Rate

In May 2024, inflation cooled down to 11.8%, resulting in an 11-month fiscal year 2024 (11MFY24) inflation rate of 24.9%. This brought the real interest rate to 10.2%, the highest maintained real interest rate since 1996, when it stood at 8.2%. With the pace of declining inflation, there is a possibility of reducing the real interest rate to achieve the target GDP growth in FY25.

Month/Year	Inflation Rate	Real Interest Rate
May 2024	11.8%	10.2%
11MFY24	24.9%	–

Inflation expectations for next year

For the next year, inflation is expected to be between 16% and 18%. This could lead to a more hawkish rate cut announcement by the SBP in FY25.

Market reactions

In the money and bond markets, the potential extent of the SBP’s rate cuts in June 2024 is already priced following the publication of April 2024 inflation data. Short-term 6-month to 12-month papers have fallen on average by 98 bps since April 2024, while yields on longer-tenure bonds have decreased by approximately 40 bps since the last auction.

Market Segment	Average Yield Change Since April 2024
Short-term (6M-12M)	-98 bps
Long-term	-40 bps

Disclaimer:

The information in this article is based on research by Research All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.