By Staff Reporter
KARACHI: The central bank may consider reducing interest rates next week as inflation slows, but worries about delayed foreign funding and global trade issues could lead to caution, a top brokerage firm said.
The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy decision on May 5. In its last meeting in March, the central bank held the rate steady at 12 percent after reducing it by a cumulative 1,000 basis points from a peak of 22 percent in June 2024 to stimulate the economy.
Brokerage Topline Securities said the central bank can keep its benchmark interest rate unchanged, resisting market expectations for a cut as it navigates delayed foreign inflows, global trade risks, and looming domestic fiscal pressures.
While falling inflation and improving external conditions bolster the case for easing, the SBP appears inclined to adopt a cautious stance to prioritise stability, according to Topline Securities’ poll.
The brokerage survey reveals a clear divide in market expectations. A significant 69 percent of respondents predict a rate reduction at the upcoming meeting, with 37 percent expecting a modest 50-basis-point (bps) cut, 30 percent forecasting a 100bps decrease, and 2 percent anticipating a bolder 150bps drop.
Yet, 31 percent of participants—down from 38 percent in the prior poll—believe the SBP will opt to hold rates steady, reflecting a subtle shift toward optimism for easing among investors and analysts.
“In a Poll conducted by Topline Securities, 69 percent of the market participants expect a rate cut of at least 50bps, while 31 percent believe that the central bank will observe the status quo,” the brokerage said. “The ratio of participants observing status quo has come down from 38 percent in previous poll to current 31 percent.”
The brokerage, however, aligns with the minority view, arguing that the SBP is unlikely to act precipitously. “We believe the central bank has room for a 200-basis-point cut by December 2025, with FY26 inflation likely averaging 6-7 percent,” the report said. “That would keep real rates at 500-600 basis points, above the historical 200-300 basis-point norm. But for May, the SBP will likely pause.”
“Furthermore, falling oil prices, falling dollar index and higher remittances also make a strong case for a rate cut,” it added. “However, the sustainability in prices/index of the former two (oil and dollar) is yet to be seen.”
Economic indicators provide a mixed backdrop for the SBP’s decision. Inflation expectations have softened considerably, with 53 percent of poll respondents now projecting FY25 inflation below 6 percent, a sharp rise from 22 percent in the previous survey.
Topline estimates 4.5-5.5 percent, while Fitch Ratings, in a recent upgrade note, sees 5 percent for FY25, rising to 8 percent in FY26.
On the currency front, stability remains a focal point: 60 percent of participants expect the rupee to trade between Rs280-290 against the US dollar, 26 percent see it weakening beyond Rs290, and 7 percent predict it will hold below Rs280. These projections reflect cautious optimism tempered by the SBP’s mandate to bolster exchange rate confidence.
Despite these tailwinds, risks abound. Expected foreign inflows for the second half of FY25 depend on the International Monetary Fund’s approval of Pakistan’s first program review, anticipated before June 2025.
The IMF has stressed maintaining a “sufficiently tight” policy to curb inflation, limiting the SBP’s maneuverability. Potential US tariff hikes pose another threat to exports, while the upcoming FY26 budget and possible gas price adjustments could stoke inflation, though their impact is unclear. The SBP may seek greater visibility on international trade dynamics before easing policy.
Since the SBP’s March 10, 2025, meeting, when it unanimously held rates at 12 percent, the 6-month Karachi Interbank Offered Rate has risen 31 basis points to 12.09 percent, and 6-month Treasury bill yields have climbed 35 basis points to 11.92 percent. These upticks suggest investors are not fully betting on an imminent cut.
The SBP’s cautious approach builds on a history of prudence shaped by external oversight and domestic constraints. Following a series of aggressive rate hikes in 2022 and 2023 to combat runaway inflation and secure IMF support, the central bank has shifted toward a more measured stance as economic conditions stabilize. The current 12 percent rate—unchanged since late 2024—reflects this pivot, balancing growth concerns with the need to maintain credibility with international lenders.
An overwhelming 95 percent of poll respondents expect the policy rate to fall within 10-12 percent by June 2025, implying cuts of up to 200bps over the next two meetings. By December 2025, projections diverge: 37 percent foresee rates dropping to 8-10 percent, 49 percent predict 10-11 percent, and 12 percent anticipate 11-12 percent. These forecasts suggest a gradual unwinding of tight policy as inflationary pressures ease and external buffers strengthen.
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