Finance Minister Aurangzeb hopes for an interest rate cut this year

Finance Minister Muhammad Aurangzeb expressed optimism for a significant policy rate reduction by the State Bank of Pakistan (SBP) later this year, aligning with inflation trends. His remarks coincide with a Reuters survey suggesting widespread expectations of a 100 basis points (bps) cut in the SBP’s key interest rate next week, following its record 22pc hold for seven consecutive policy meetings.

Speaking at the Pak-China Business Forum in Shenzhen, the finance minister underscored the stability of the country’s foreign exchange reserves, attributing it to both administrative measures and structural changes. He highlighted a notable deceleration in inflationary pressures to slightly above 11 per cent, surpassing market forecasts of 14pc.

While acknowledging that the policy rate falls within the central bank’s purview, Aurangzeb articulated anticipation for its alignment with inflation, given the substantial buffer in positive real interest rates necessitated to maintain stability.

Reflecting on market responses, Aurangzeb cited positive indicators such as increased foreign investments in the stock exchange and a resurgence of fixed income institutional flows, indicative of burgeoning confidence in the country’s economy.

The minister elaborated on the country’s strategic trajectory, emphasizing three pivotal aspects termed the “road to market” strategy: export-led growth, foreign direct investment (FDI), and access to international capital markets. Particularly, he emphasized a keen interest in accessing Chinese capital markets, highlighting preparatory stages for Pakistan’s inaugural panda bond issuance—a novel endeavor poised to follow a structure akin to Egypt’s previous initiative.

Having articulated aspirations to raise $300 million in Panda bonds contingent upon improved credit ratings, Aurangzeb elucidated Pakistan’s robust foreign reserves exceeding $9 billion, nearly equating to a two-month import cover. He accentuated the qualitative aspect of these reserves, emphasizing their non-reliance on debt accumulation.

SBP Expected to Cut Rates by 100 bps

The SBP’s anticipated 100bps rate cut aligns with projections of 16 analysts in a Reuters poll, with one outlier predicting a 150bps reduction and four others anticipating a 200bps cut. Reflecting on economic dynamics, the anticipated rate cut arrives amidst a sluggish growth trajectory over the past two years, as Pakistan navigated stringent reforms under an IMF bailout to stabilize its economy.

Despite an expected growth rate of 2pc for the current fiscal year and a targeted 3.5pc growth projection, Pakistan is poised to formally seek a longer-term IMF bailout, following a short-term program earlier this year. The forthcoming decision, anticipated ahead of Pakistan’s annual budget, underscores a strategic shift towards facilitating economic recovery amidst evolving global economic landscapes.

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