ISLAMABAD: Pakistan’s central bank is expected to slash the policy rate in its upcoming Monetary Policy Meeting (MPC), a leading brokerage firm said on Wednesday, saying decreasing global oil prices and higher remittances make a strong case for a cut. 

The State Bank of Pakistan (SBP) kept the interest rate unchanged at 12 percent in its last MPC meeting in March. The central bank put a hold on slashing the interest rate after it made a series of cuts totaling 1,000 basis points to revive the economy from a record high of 22 percent in June 2024.

The SBP is scheduled to hold its MPC committee meeting on May 5, Topline Securities said. 

“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,” Topline Securities said in a report.

“The ratio of participants observing status quo has come down from 38 percent in previous poll to current 31 percent.”

The report said out of this 69 percent, 37 percent expect a rate cut of 50bps while 30 percent expect a rate cut of 100bps. Only 2 percent expect a rate cut of 150bps.

Topline Securities said that the SBP has further room to cut around 200bps till December as the FY26 inflation can average between 6-7 percent, translating into a real rate of 500-600bps. 

“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.”

Topline Securities said that despite its view, it believes the central bank will observe the status quo in the upcoming MPC meeting due to various reasons. 

It said the expected foreign inflows for the second half of FY25 have not materialized yet and are expected to be received once the first review of the International Monetary Fund is approved by the Board. 

Furthermore, the IMF has also mentioned in its press release that Pakistan remains committed to maintaining a sufficiently tight monetary policy to keep inflation low.

It said another reason why the central bank will maintain the same rate is because the US tariff risks still loom and “we expect the central bank to maintain status quo till any clarity on this global development.”

Inflation in Pakistan soared to around 40 percent in May 2023, driven by currency devaluation and subsidy removals for IMF approvals. But inflation dropped to a near-decade low of 1.5 percent in February, providing room for the central bank to boost growth.

Economists also warn of the risk of the government taking advantage of lower interest rates to increase borrowing for an expansionary budget. That would potentially destabilize the progress made under the IMF program and crowd out the private sector.

With additional input from Reuters