London July 17 2024: Pakistani policymakers cut their key rate from 22.00% to 20.50% in June 2024, and we think that they will cut it to 16.00% by the end of the year, states Fitch in it’s detailed report on Pakistan.
The rating agency also expect that the Pakistani rupee will remain pretty stable over the remainder of the year, which will open up more space for interest rate cuts.
Fitch had always expected that the State Bank of Pakistan (SBP) would loosen policy this year, and policymakers made
their first cut even earlier and more than we or consensus had expected. On June 10 2024, the SBP cut its policy rate by
150 basis points (bps) (Consensus: 100bps) to 20.5%. The rating agency retain our view that SBP will cut its policy rate to 16.00% by the end of 2024 as we expect inflation to continue its downward trend towards the target rate of 5-7% and the rupee to remain stable throughout.
Fitch expect that inflation will continue to slow over the remainder of the year. One of the key drivers of its recent slowdown was a sharp decline in food prices; the headline inflation slowed down more than policymakers expected, from 17.3% y-o-y in April to 11.8% in May.
Fitch still expect that headline inflation will continue to slow throughout the year, slipping from 11.8% in May to 6.2% in December. While there are risks of inflation resurging due to adjustments in electricity and gas prices, the monetary policy committee mentioned that ‘cumulative impact of earlier monetary tightening is expected to keep inflationary pressure in check.’
The rating agency also expect that the Pakistani rupee will remain pretty stable over the remainder of the year, which will open up more space for interest rate cuts.
For the past six months, the Pakistani rupee hovered around PKR 278/USD, and the agency expect that the rupee will only weaken slightly over the remainder of 2024, slipping to PKR 290/USD. Policymakers’ success in cracking down on the parallel market has allowed the currency to be adjusted to a more defensible rate and it would take a substantial shock to disrupt the rupee.
