SBP starts monetary easing on receding inflationary pressures
Overview of the policy rate cut
In a significant move, the State Bank of Pakistan (SBP) has started the monetary easing cycle with its first rate cut in almost four years. The Monetary Policy Committee (MPC) decided to cut the interest rate by 150 basis points (bps), bringing the rate down to 20.5%.
Reasons behind the rate cut
The MPC’s decision is based on several factors:
- Significant reduction in inflationary pressures
- Fiscal consolidation
- Stable PKR parity from an improved current account position
- Gradual recovery in the industrial sector
Expectations for future rate cuts
The SBP is expected to remain cautious in opting for aggressive monetary easing. However, a further monetary easing of 200 bps is anticipated by the end of the year. This cautious approach is due to probable near-term inflationary pressures related to the upcoming budget and energy price adjustments.
Impact on the economy and investor confidence
The commencement of monetary easing is expected to have a positive impact across the board, boosting investor confidence. This move is likely to be particularly beneficial for several sectors, including:
| Sector | Top Companies |
|---|---|
| Exploration & Production | OGDC, PPL, MARI |
| Banks | MCB, UBL |
| Fertilizers | FFC |
| Power | HUBC |
| Cement | LUCK, MLCF, FCCL |
| Automobiles | INDU |
| Steel | MUGHAL |
| Textile | ILP |
Fiscal consolidation to keep demand in check
The SBP’s decision to start monetary easing is considered appropriate given the expectation of continued fiscal consolidation. Revenue-generating measures in the upcoming budget and limited room to increase expenditures are expected to keep demand in check. Additionally, the stability of the exchange rate is supported by the shifting of external debt maturities from commercial to bilateral/multilateral creditors and improving external inflows through remittances and the Roshan Digital Account.
Financial Impact of the Rate Cut
The table below shows the financial impact of the 150bps cut in the policy rate on various companies:
| Sector | Company | Long Term Debt | Current Portion of LT Debt | Short Term Debt | Short Term Inv & Cash | Net Conv. Borrowing | Additional Interest Saving | After Tax Impact | Outstanding Shares | Per Sh Impact | Equity | Assets | D/E | D/A | % Impact on CY/FY25 EPS |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FERTILIZERS | FFC | 17,703 | 6,794 | 717 | 98,858 | 74,161 | (1,112) | (679) | 1,272 | (0.53) | 157,891 | 331,789 | 16% | 8% | -1.5% |
| FATIMA | 6,281 | 2,138 | 1,482 | 20,261 | 10,360 | (155) | (95) | 2,100 | (0.05) | 127,779 | 240,305 | 8% | 4% | -0.3% | |
| OIL & GAS | OGDC** | – | – | – | 68,547 | 68,547 | (1,028) | (627) | 4,301 | (0.15) | 1,223,829 | 1,556,447 | 0% | 0% | -0.3% |
| PPL** | – | – | – | 55,055 | 55,055 | (826) | (504) | 2,721 | (0.19) | 624,978 | 883,579 | 0% | 0% | -0.4% | |
| POL** | – | – | – | 44,370 | 44,370 | (666) | (406) | 284 | (1.43) | 73,499 | 172,816 | 0% | 0% | -1.4% | |
| MARI | 613 | 150 | – | 61,354 | 60,591 | (909) | (554) | 133 | (4.16) | 199,229 | 321,635 | 0% | 0% | -0.7% | |
| PSO | – | – | 408,233 | 22,551 | (18,272) | 274 | 167 | 469 | 0.36 | 225,981 | 1,026,627 | 181% | 40% | 0.7% | |
| APL | – | – | – | 32,172 | 32,172 | (483) | (294) | 124 | (2.37) | 52,896 | 107,984 | 0% | 0% | -3.5% | |
| TECHNOLOGY | SYS | – | – | 1,419 | 7,998 | 6,579 | (99) | (60) | 291 | (0.21) | 33,988 | 50,907 | 4% | 3% | -0.4% |
| GLASS & CERAMICS | TGL* | 1,171 | 1,081 | 2,422 | 176 | (4,498) | 67 | 41 | 172 | 0.24 | 17,642 | 26,659 | 26% | 18% | 0.9% |
| GHGL* | 38 | 28 | – | 1,494 | 1,428 | (21) | (13) | 1,000 | (0.01) | 32,162 | 49,216 | 0% | 0% | -0.2% | |
| PHARMA | SEARL* | 4,189 | 8 | 9,275 | 226 | (13,246) | 199 | 121 | 511 | 0.24 | 31,989 | 53,130 | 42% | 25% | 44.4% |
| FEROZ* | 111 | 47 | 2,833 | 591 | (2,400) | 36 | 22 | 43 | 0.51 | 6,555 | 12,001 | 46% | 25% | 6.1% | |
| AGP* | 2,097 | 434 | 1,699 | 143 | (4,087) | 61 | 37 | 280 | 0.13 | 10,566 | 17,484 | 40% | 24% | 2.4% | |
| CPHL* | 2 | 27 | 1,185 | 1,597 | 383 | – | – | – | – | – | – | – | – | – |
Investment perspective
From a market perspective, the start of monetary easing is expected to be positive across various sectors, helping to build investor confidence. Cyclical sectors such as Cement, Steel, and Automobiles are likely to come into the spotlight. However, concerns remain on the demand side due to contractionary fiscal policy and a slower recovery of the industrial sector. Sectors benefiting from circular debt resolution and energy tariff rationalization are also expected to perform well.
Disclaimer:
The information in this article is based on research by AKD Securities Limited. 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.
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