Favorable real interest rates coupled with easing inflation provide an opportunity for the central bank of Pakistan to potentially pursue further monetary easing. However, this decision will depend on a number of interrelated factors.
Lower inflation lowers the cost of living and increases economic stability, thus allowing the State Bank of Pakistan (SBP) to lower interest rates and encourage growth. Additionally, favorable real interest rates, where nominal rates are higher than inflation, support investor confidence and make borrowing more attractive, enabling businesses and consumers to invest and spend.
In this context, prominent brokerages like Topline Securities have expressed their views on the likely direction of the State Bank’s policy decisions. A survey conducted by Topline Securities indicated that 71% of respondents expected the central bank to implement a minimum rate cut of 200 basis points (bps). Of these, 63% expect a cut of 200bps, 30% predict a cut of 250bps, and 7% predict a cut of more than 250bps. In contrast, the remaining 29% expect a rate cut in the 50-150bps range, with 69% of this group expecting a 150bps cut.
This shift in direction will provide substantial support to various industries, reduce borrowing costs, and stimulate economic activity. Lower interest rates will make borrowing more affordable for enterprises, encouraging them to invest in innovation initiatives, expand their operations and increase productivity. This increase in business activity has the potential to drive overall economic expansion. Additionally, the lower cost of borrowing will empower consumers to increase their spending, thereby further increasing demand within the economy. A significant reduction in interest rates could also ease Pakistan’s fiscal pressure by reducing debt servicing costs.
Additionally, global economic dynamics also play an important role in SBP’s decision-making. A fall in global commodity prices, particularly oil, could help ease inflationary pressures, making it easier for the State Bank to justify cutting interest rates. However, if major central banks like the US Federal Reserve maintain high interest rates, the State Bank may be cautious about implementing significant cuts. Such a move could deter foreign investment and adversely affect the value of the rupee.
The State Bank’s approach to monetary easing will be a delicate balancing act that will ensure that inflation remains under control, external risks are manageable, and monetary policies are consistent with its objectives. In doing so, it can balance the need to accelerate economic growth while protecting currency stability and maintaining long-term economic stability.