Policy rate likely to be cut by 200bps in upcoming MPC: experts

• SBP has reduced interest rates four times in row since June.
• CPI for Nov clocks in at 4.9% well below general market consensus.
• 71% poll participants expect minimum rate cut of 200bps by SBP.

The State Bank of Pakistan (SBP) is likely to reduce its key interest rate further during its policy meeting set to take place later this month, in the wake of declining inflation, The News reported citing experts.

Most analysts and surveys conducted by brokerage houses expect the SBP’s Monetary Policy Committee (MPC) to cut the policy rate by 200 basis points (bps) when it meets on December 16.

The SBP cut its key interest rate by 250bps to 15% in November. The SBP has reduced interest rates four times in a row since June, totaling 700bps.

The consumer price index (CPI) for November clocked in at 4.9% well below the general market consensus.

"This reading places inflation even below the SBP's target range of 5%-7%. With CPI inflation expected to remain in single digits for the coming months, the current policy rate of 15% provides significant room for rate cuts in upcoming monetary policy meetings,” said Chase Securities in a note on Tuesday.

According to a poll conducted by Topline Securities, 71% of the participants expect that the central bank will announce a minimum rate cut of 200bps.

"Out of the 71%, 63% expect the interest rate to be cut by 200bps, 30% expect a cut of 250bps, and 7.0% anticipate a cut of more than 250bps.

The participants are expecting a rate cut due to high real rates, which are high as the monthly inflation reading for November has touched a 78-month low of 4.9%, said Topline Securities in a note.

The significant fall in year-on-year inflation in the last few months is on the back of faster food disinflation and negative electricity price adjustments.

“We also hold the view that the SBP will announce a rate cut of 200 bps, taking the total cut to 900bps,” it said.“Post this rate cut of 200bps, real interest rates will remain at 810bps, still higher than Pakistan’s historic average of 200-300 bps,” it added.

However, based on average inflation of 7%-8% for FY25 and 8.5%-9.5% for FY26, real rates after this 200bps rate cut (policy rate 13%) would be 400-550bps, it added.

"Based on the above, we maintain our interest rate target of 11%-12% for December 2025."

"The sufficient real rates required to accommodate any external or budgetary shock: In order to absorb any mini-budget impact and external shock, we believe the central bank will continue to keep a positive real rate in the range of 300-400 bps in medium-term over forward-looking inflation," it said.

According to the report, led by falling inflation expectations, the six-month Karachi interbank offered rate and Treasury bills rate are down 74-81bps since the last monetary policy meeting on November 4, and currently hovering at 12.59% and 12.16%, respectively.