Moaaz Manzoor

Experts anticipate a policy rate cut to 10% in FY25 as inflation eases due to the favorable base effect and lower energy costs but caution that external financing, currency stability, and IMF conditions will determine the pace of monetary easing, reports WealthPK.

Pakistan’s inflation outlook appears to be downward, supported by the favorable base effect, lower energy costs, and a delayed hike in gas prices. Speaking with WealthPK, Muhammad Saeed Khalid Siddique, Chief Economist & Market Strategist at Adam Securities Limited, highlighted that easing inflationary pressure in the first seven months of FY25 had been a direct consequence of these factors.

“The phenomenon of favorable base effect has improved inflation figures,” he said, adding that lower electricity charges and the postponed gas price hike had further reinforced this trend. Siddique projected that inflation could dip below 2% in the third quarter of FY25 due to the subsidized electricity tariffs, and he expected the average inflation rate to stabilize around 6% for the fiscal year.

Given this outlook, he foresaw the policy rate falling to 10%, allowing businesses greater access to cheaper credit and potentially stimulating economic activity. Ali Najib, Head of Equity Sales at Insight Securities, supported the view that interest rates may decline but cautioned against excessive optimism. He believed while a rate cut is likely, the magnitude and timing will hinge on key macroeconomic variables such as inflation stability, external financing, and exchange rate.

“If inflation stays controlled, the SBP may cut rates further in 1H2025 (likely in the 1-2%),” Najib said. However, he warned that excessive monetary easing could pressure the rupee and deter foreign investment. He emphasized that fiscal constraints and IMF conditions might restrict aggressive rate cuts, necessitating a more measured approach. “A moderate easing cycle cannot be ruled out, but the SBP is likely to adopt a cautious approach to balanced growth, inflation, and financial stability,” he added.

While the economic fundamentals suggest room for monetary easing, the policymakers face the challenge of ensuring stability while supporting growth. A lower policy rate could help businesses and consumers, but aggressive cuts risk capital outflows and exchange rate volatility. The SBP will likely adopt a measured stance, making data-driven decisions to maintain macroeconomic equilibrium.

Credit: INP-WealthPk