The ultimate monetary policy for FY2023–2024 will be decided by the State Bank of Pakistan Monetary Policy Committee meeting on June 10, 2024. A rate drop is becoming increasingly likely.
Arif Habib Limited (AHL) study predicts that the policy rate would drop by 200 basis points, possibly to 20 percent—a level that was last observed in March and April of 2023. Numerous positive economic data included in the AHL report support this prognosis and point to a favorable climate for the start of a monetary policy reversal.
The decreased trend of Pakistani inflation is one of the main reasons for the expectation of a rate drop. The core and headline inflation rates have both significantly improved. For the 10MFY24, the average headline inflation rate dropped from 28.23 percent during the same period previous year to 25.97 percent. It is projected that on May 24, inflation would drop even further to -13 percent, translating into a real interest rate of 900 basis points, far higher than the historical 10-year average of negative 44 basis points.
In terms of the external side, the current account deficit shrank by 95% to $202 million during 10MFY24, demonstrating impressive improvement. The PKR’s stability in relation to the US dollar has been aided by this large decline.
The IMF recognized these encouraging economic achievements in its most recent country report, but it also underlined how crucial it is to have a strict monetary policy in place to guarantee stability. But the IMF also said that if Pakistan’s inflation keeps down and the foreign currency market keeps getting better, the position may be reevaluated.
Pakistan will nonetheless agree with the IMF to maintain a reasonably restrictive monetary policy even with a possible 200bps rate drop. It is reasonable to anticipate a relaxation of the monetary policy framework given the improvements in both the external account and inflation. In addition to fostering economic expansion, the projected rate reduction would be consistent with the changing economic landscape.
