Positive interest rates: What’s next for Pakistan's monetary policy?

[Such TV]

Positive interest rates: What’s next for Pakistan's monetary policy?

The easing of inflation alongside favorable real interest rates presents an opportunity for Pakistan's central bank to possibly pursue further monetary easing; however, this decision will depend on a variety of interconnected factors.

A decrease in inflation alleviates the cost of living and enhances economic stability, thereby allowing the State Bank of Pakistan (SBP) to reduce interest rates and encourage growth. Additionally, Favorable real interest rates, where nominal rates exceed inflation, support investor confidence and make borrowing more attractive, enabling businesses and consumers to invest and spend.

In this context, prominent brokerages, such as Topline Securities, have shared their perspectives on the likely direction of the SBP's policy decisions. A survey conducted by Topline Securities indicated that 71% of respondents anticipate the central bank will implement a minimum rate cut of 200 basis points (bps). Among these, 63% expect a reduction of 200bps, 30% foresee a decrease of 250bps, and 7% predict a cut exceeding 250bps. Conversely, the remaining 29% expect a rate cut within the range of 50-150bps, with 69% of this group anticipating a reduction of 150bps.

A shift in this direction would offer considerable assistance to various industries, decrease borrowing expenses, and stimulate economic activity. Diminished interest rates would render borrowing more affordable for enterprises, motivating them to invest in innovative initiatives, broaden their operations, and enhance productivity. This surge in business activity has the potential to propel overall economic expansion. Furthermore, the lowered borrowing costs would empower consumers to increase their spending, thereby further enhancing demand within the economy. A significant decrease in interest rates could also ease Pakistan's fiscal pressures by reducing the expenses associated with debt servicing.

Additionally, Global economic dynamics also play a crucial role in the SBP's decision-making. A decline in global commodity prices, especially oil, could help reduce inflationary pressures, making it easier for the SBP to justify interest rate cuts. However, if major central banks like the U.S. Federal Reserve maintain high interest rates, the SBP might be cautious about implementing significant cuts. Such a move could deter foreign investment and negatively impact the rupee's value.

The SBP's approach to monetary easing will be a delicate balancing act ensuring inflation remains under control, external risks are manageable, and fiscal policies are aligned with its objectives. By doing so, it can balance the need to stimulate economic growth while safeguarding the stability of the currency and maintaining long-term economic stability.

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