Tensions with India to ‘influence’ SBP’s monetary policy decision

• Experts diverge on anticipated rate cut quantum, businesses demand substantial reduction to revive economy
• Some see status quo after tomorrow’s meeting as war-like situation expected to hike food prices

KARACHI/ISLAMABAD: Despite a long-term decline in inflation and real interest rates above 11 per cent, opinions on the State Bank of Pakistan’s (SBP) likely decision on the policy rate are divided, with trade and industry sectors advocating for a significant cut.

Researchers conducted polls to gauge market sentiment, but the 0.3pc inflation in April has caused division among those who were confident there would be no change in the interest rate.

The SBP’s Monetary Policy Committee will meet on Monday to set the key interest rate for the next two months. The central bank had delivered a surprise by leaving its policy rate unchanged in the last review, disappointing the business community, which was demanding a substantial cut of at least 500bps. Many experts were expecting a slight cut of up to 50bps.

However, once again, many experts believe the SBP would cut the rate by 50bps. Some have also found reason for a likely status quot as they feel the war-like situation between India and Pakistan has created uncertainty that may escalate prices.

This situation may force the central bank to adopt a cautious approach in face of sudden shocks of higher inflation.

In a poll conducted by Topline Securities, 69pc of market participants expect a rate cut of at least 50bps, while 31pc believe that the central bank will maintain the status quo.

“We believe the central bank will maintain the status quo in the upcoming meeting,” said the Topline.

The April Consumer Price Index (CPI) is expected to bottom out and clock in below 0.50pc year-on-year at 0.29pc. For the full FY25, inflation is expected to average between 4.5 and 5pc, it added.

However, a poll conducted by Reuters shows that out of 14 analysts and investors, nine believe that the State Bank will keep the rate unchanged; three expect a 50bps cut, while the two were expecting a 100bps cut.

Due to continuous deceleration in inflation, it is generally believed in the financial sector that the interest rate should be reduced for two reasons: to attract domestic investors, increase economic growth, and reduce the real interest rate, now over 11pc.

The State Bank has slashed the interest by 1,000bps since June 2024 to 12pc and kept it unchanged in March. The business circle demands further cuts to revive economic activities, but the policymakers look cautious, fearing higher inflation in the coming months.

Some bankers believe the geopolitical tensions added uncertainty, which demands a cautious approach.

A Tresmark (global currency tracker) poll shows 68pc of traders expect no change in monetary policy stance. CPI has collapsed to 0.3pc in April against 0.7pc in March and 17.3pc last year. Core inflation has dipped to 7.4pc. A textbook setup for a rate cutMarkets are rattled by trade risks, capital outflows, and a central bank that’s rightly cautious, it said.

“Over $225m has quietly exited from bonds and equities in April. A cut could widen the exit door,” said the Tresmark report.

“That said, the growth story is buried. Export-to-GDP keeps falling. FDI is limp. If there’s ever been a case for monetary stimulus, it’s now. Perhaps the central bank may need to prioritise growth over caution,” said Tresmark CEO Faisal Mamsa.

Businesses call for major cut

Meanwhile, the United Business Group leader has strongly slammed the high interest rate regime and said that the benefits of low inflation should be reflected in the SBP policy rate decision.

Member Central Core Committee United Business Group (FPCCI) Ahsan Zafar Bakhtawari said that 0.3pc inflation in April had created a ground to cut the interest rate by 400bps to 8pc and bring down the electricity tariff to Rs26 per unit to provide real relief to the economy.

“When inflation has dropped to such a low level, bringing the policy rate down to single digits is both economically logical and essential for policy coherence,” he said while addressing a meeting of the business community in Islamabad on Saturday.

“Reducing the interest rate to 8pc would stimulate investment, lower borrowing costs, and accelerate economic activity,” he said.

At the same time, the business community expressed serious concerns about high electricity rates, which were hurting industrial production and squeezing the purchasing power of ordinary consumers.

The business community warned that if this opportunity is not seized, the country could face industrial stagnation, unemployment, and economic slowdown despite the temporary dip in inflation.

The Rawalpindi Chamber of Commerce and Industry (RCCI) also urged the SBP to cut its policy rate to single digits to stimulate industrial activity and drive sustainable economic growth.

RCCI President Usman Shaukat emphasised that the current interest rate is significantly hampering business growth and must be lowered.

“Pakistan currently maintains the highest interest rate regime in the region,” said Mr Shaukat in a statement.

Published in Dawn, May 4th, 2025