Is rate cut finally in the offing?

SBP should give breathing space to indebted borrowers

All eyes on SBP again. Little gains in the economic stability are being applauded and visibly noticed. After successful conclusion of the elections and formation of the government with coalition to leading parties is giving confidence to the capital markets. So has the appointment of top Banker, Aurangzeb Khan to lead as finance czar.

Economic data wise CPI for February clocked in at 23% while March's expected to be 19-20% with base effect wearing off, inflation path on YoY basis is on sustainable downward trajectory. Thanks to largely stable PkR parity vs USD that has remained at PKR 280/USD for exactly a year now. Similarly, the current account is likely to be in surplus for next two months as Ramadan effect pours in further remittances in March and April.

So what should SBP do? Finance Minister has hinted already the rate cut is on its way. Well, it should have been down in February anyways because the biggest effect of high interest cost is on sovereign federal budget itself. Nearly all of the tax receipts are heading towards paying interest cost thereby complicating the fiscal sustainability in the country. Marginal cut of 100bps will give relief to federal govt and indebted borrowers at the brink of default.

Whether SBP kicks the can to the policy on April 29th once IMF is actively engaged and lobbied for another bailout package for medium term or even later is entire a subjective call now. Wary of not dismaying IMF's staff team that is landing in Pakistan now, maybe SBP could show active prudent monetary tightening stance especially when other emerging countries such as Nigeria and Egypt are seeing pressure on domestic currencies.

Reducing the policy rate from 22% to 21% will not cause resurgence in imports nor add material pressure on demand for USD or imports thereby upending the presumed "inflation stability" that - I repeat - is largely a function of currency depreciation and utility prices. Both the factors have less impact of high monetary policy and more due to low exports and structural inefficiencies in energy sector.

SBP must bring optimism back and show confidence in inflation outlook by cutting 100 bps. A 21% interest rate is already high enough to please IMF and ensure "proactively tight monetary policy". Let the poor debtors (including govt) breath a sigh a relief finally. Or perhaps SBP would make us wait until April 29th and save some more dollars and wait for March's CPI. A lot of damage is done with interest rates in 20s% - defaults are looming even after 100 bps cut