Brokerage House Expects 100BPS Cut in Policy Rate  

The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on January 27, with brokerage house Topline Securities expecting a 100bps cut in policy rate.  In a poll conducted by Topline Securities, 61 percent of the participants said that they expect the central bank to announce a rate cut of 100bps.  Amongst the remaining, 7 percent expect a rate cut of 50bps, 7 percent expect a rate cut of 150bps, 17 percent expect a rate cut of 200bps, 2 percent expect a rate cut of 250bps, while 6 percent expect no change in the interest rate.  The brokerage house said that in its view, participants are expecting rate cut due to high real rates of ~950bps in Jan 2025 compared to historic average of 200-300bps despite 900bps cut in total interest rates in last five consecutive meetings since Jun 2024.  Real rates are high as monthly inflation reading for Jan 2025 is expected to clock in at around 3.5 percent, lowest in 103 months. This significant fall in YoY inflation in last few months is on the back of faster food disinflation and negative electricity prices adjustments (FCA), it said.  The brokerage house said it is of the view that the central bank will announce a rate cut of 100bps, taking total cut to 1000bps. This will be 6th consecutive cut of this cycle. Post this rate cut of 100bps, real interest rates will remain at 850bps, still higher than Pakistan’s historic average of 200-300bps.   However, based on average inflation of 6.5-7.5 percent for FY25 and 8.5-9.5 percent for FY26, real rates after this 100-rate cut (policy rate 12 percent) would be 300-500bps. The brokerage house has maintained its interest rate target of 11-12 percent for Dec 2025.   In order to absorb any gas price hike, fuel prices driven by increase in PDL and/or any mini budget impact, we believe, Central bank will continue to keep positive real rate in range of 300-400bps in medium terms over forward-looking inflation, it added.  Led by falling inflation expectations, the 6M KIBOR and Treasury bills rate are down 23-32bps since last monetary policy meeting on Dec 16, 2024 and currently hovering at 11.87 percent and 11.65 percent, respectively.  Topline also conducted a poll of key market participants on expectations over policy rate, and average inflation for FY25. According to survey results, 73 percent of the participants expect that the central bank will announce a rate cut of 100bps.  Amongst the remaining, 7 percent expect a rate cut of 50bps, 7 percent expect a rate cut of 150bps, 17 percent expect a rate cut of 200bps, 2 percent expect a rate cut of 250bps, while 6 percent expect no change in the interest rate. On inflation side, 56 percent participants now expect inflation below 8 percent for FY25 which is slightly lower than earlier survey of 59 percent.   Slight increase in expectations for lower inflation are due to recent increase in international oil prices, in Topline’s view and expectations of gas price hikes under the IMF program guidelines. Since Jan 1, 2025, international oil prices have increased by 8 percent from $75/bbl to $81/bbl.   In the last analysts’ meeting, the SBP Governor stated that the FY25 average inflation will fall below the previously disclosed range of 11.5-13.5 percent. The revised range of inflation will be disclosed in the upcoming Jan-2025 meeting and we think this target will be in range of 7-9 percent.  Topline expects inflation to average between 6.5-7.5 percent for FY25 and 8.5 percent-9.5 percent for FY26.   On Jun 2025 interest rate target, 82 percent of participants are expecting interest rates to clock in at 10-12 percent, compared to 59 percent in the previous survey. In total, 94 percent now expect interest rates below 12 percent compared to 71 percent earlier. The brokerage house expects interest rate at 11-12 percent by Dec-2025.