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Pakistan’s Central Bank Expected to Maintain Key Rate at Fourth Straight Policy Meeting

Pakistan’s central bank is anticipated to keep its key rate unchanged at a fourth consecutive policy meeting on Tuesday, according to analysts. Inflation is projected to start declining in the coming months, which could pave the way for rate cuts to stimulate economic growth.

Following the approval of a $3 billion loan program by the International Monetary Fund (IMF) in July, Pakistan has been striving to achieve economic recovery under a caretaker government. While the loan helped prevent a sovereign debt default, it also introduced conditions that complicated efforts to control inflation.

In June, Pakistan’s key rate was raised to a record high of 22%, and it has remained unchanged at the last three rate meetings.

A Reuters poll of 12 analysts indicates that there is expected to be no change in the key rate on Tuesday. However, one analyst has called for a 100 basis point reduction. The consensus in the market is that rates will gradually start to decline in the first half of next year, depending on the trajectory of inflation.

Usman Zahid, director of research at AKD Securities, explained that inflation is still too high, and negative real interest rates do not warrant any easing at this point. He pointed out that trading partners like the United States already have positive real interest rates.

Zahid noted that the 2.7% month-on-month increase in inflation in November was primarily due to the rise in gas prices, among other factors. However, annual inflation is expected to start easing from February 2024.

According to data from the Pakistan Bureau of Statistics (PBS), annual inflation stood at 29.2% in November, slightly higher than October but significantly lower than the May peak of 38%.

Investors have already factored in the possibility of peak interest rates in Pakistan, and the anticipated successful completion of the IMF program has boosted stock markets and the currency.

In the week ending December 8, Pakistan’s benchmark index surpassed 66,000 points, reaching a new all-time high. It recorded a weekly return of 4,532 points or 7.3%, the highest ever in terms of points.

Mohammad Sohail, CEO of Topline Securities, commented that a stable currency, low current account deficit, and the expected decline in inflation in the coming months might persuade committee members to lower rates. He even suggested that the key rate could potentially decrease by 100 basis points on Tuesday itself.

Overall, the median expectation among analysts is for no change in the key rate.

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