SBP Cuts Policy Rate after One Year, But Warns of Budgetary Risks to Inflation

At last, the SBP has cut the policy rate by 150 bps to 20.5% after maintaining it at 22% for seven MPC meetings since June last year.

This should exert downward pressure on inflation, provided that a resurgence in demand does not put pressure on the exchange rate.

The KIBOR had been inching down for weeks and fell below 21% last week.

The stock market should also react positively to this.

The statement of the MPC notes….”At the same time, the MPC viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments.”

In our opinion, this rate cut needs to be accompanied by other structural changes at the public finance level. Otherwise, except for some possible external factors such as a decline in international oil prices, there will be no support at the national level for a sustained decline in interest rates.

The policy rate remaining above 20% primarily reflects a breakdown in the management of public finances. Unless we see progress in curbing government expenditure and managing the circular debt in the energy sector, the cut in the policy rate will not be sustainable.

MPC Statement

Brent Crude Logs Biggest Weekly Drop Since September on Weak Demand, Easing Tensions

Oil prices were under pressure this week. Brent crude oil futures fell 1.9% to $73 per barrel on Friday, registering the biggest weekly loss since early September, with prices dropping over 7%. The decline was attributed to weaker demand forecasts from OPEC and the International Energy Agency (IEA), slowing economic growth in China, and signs of easing geopolitical tensions in the Middle East. Both OPEC and the IEA revised down their demand forecasts for 2024 and 2025. China's refinery output declined for the sixth consecutive month, impacted by weak fuel demand and the growing adoption of electric vehicles (EVs). Meanwhile, U.S. crude oil production reached a new record last week. Although a drawdown in U.S. crude inventories and stronger-than-expected retail sales in September provided some support to oil prices, easing concerns about a broader conflict in the Middle East exerted additional downward pressure on the market.

A Snapshot of Exchange Traded Funds at PSX

PSX Strongly Rebounds

The Pakistan Stock Exchange (PSX) reacted positively to the conclusion of the IMF staff-level agreement and has now recovered a substantial part of the losses sustained on Monday. Today, out of the 1,139-point gain in the KSE-100 Index, around 800 points were contributed by UBL, OGDC, PPL, and Meezan Bank.

PakStox Outlook

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