Brokerage House Sees Further Cut in Policy Rate 

The State Bank of Pakistan (SBP) is expected to extend its rate-cutting cycle with another 50bps reduction in the upcoming monetary policy review on March 10, 2025, brokerage house Arif Habib Limited (AHL) said in a report on Thursday.  The expected cut will bring the policy rate to 11.5% percent, marking the seventh consecutive cut since June 2024.  The report noted that while the easing trend has been fueled by a sharp decline in inflation and external sector stability, emerging concerns suggest the central bank may soon shift to a more cautious stance.  It further said that with inflationary pressures likely to re-emerge and market yields creeping up, the end of the rate cut cycle may be closer than anticipated.  The report noted that the sharp deceleration in inflation has been the primary driver of rate cuts. January 2025 saw inflation plunge to 2.4 percent, the lowest in 111 months, while February 2025 is projected to bring it further ease to 2.2 percent.  AHL said this disinflationary phase is largely base effect driven, and as this effect fades, headline inflation is likely to pick up again. It pointed out that core inflation remains downward sticky, averaging 10.6 percent in 7MFY25 and expected to hover in the 8-9 percent range for the remainder of the fiscal year.  It said that this signals that underlying inflationary pressures are yet to subside completely. warranting a measured approach to further easing.  The current account surplus in 7MFY25 stood at $682 million, reversing last year’s deficit of $1.8 billion. However, January 2025 flipped the script, with a current account deficit of $480 million after three consecutive months of surplus.  Additionally, the import bill has picked up in recent months, with January 25 figure surpassing the $5 billion mark. The PKR has also started showing signs of weakness, depreciating by 0.3 percent since mid-January 2025, now trading at 279.62.  On the other hand, remittances surged by 32 percent YoY to $20.8bn in 7MFY25, providing a much-needed cushion, rising imports and currency depreciation could pose risks to future rate cuts.  Money market yields have started to move higher, signaling market sentiment that the policy rate may be nearing a bottom. Since the last monetary policy (January 2025), yields in the secondary market have inched up across tenors. The 3-month, 6-month, and 12-month yields increased by 27bps, 25bps, and 29bps, respectively. Meanwhile, longer-term yields have also risen, with 3-year and 5-year rates at 29bps and 14bps, while the 10-year yield remains at 10bps.  AHL said this suggests that market participants are beginning to anticipate a slowdown in the rate cut cycle, reinforcing the view that we may be approaching the end of the easing phase. Given the sharp decline in inflation and stable reserves, a 50bps rate cut seems like a logical step in the upcoming policy meeting, it added.  However, with core inflation remaining elevated, the current account tuning red, and market yields creeping up, SBP is likely to adopt a more measured approach going forward. The days of aggressive rate cuts could be behind us, and we may now be entering a phase of cautious recalibration.  While the upcoming cut should provide further relief to industries grappling with high production costs-especially in the backdrop of a 1.9 percent YoY contraction in Large-Scale Manufacturing during 1HFY25-the broader economic picture suggests that policymakers will tread carefully from here on.  The easing cycle is not over yet, AHL said, but the runway for further rate reductions is getting shorter. SBP faces a delicate balancing act on March 10, weighing the need for growth against the imperative of maintaining macroeconomic stability, it added.