In a noteworthy development for Pakistan’s economic landscape, the country’s real interest rate, calculated by deducting the inflation rate from the current interest rate, has surged into positive territory after a hiatus of 37 months. This significant shift has bolstered expectations for an impending reduction in the central bank’s policy rate, anticipated to be announced in the forthcoming monetary policy slated for late April 2024.
The real interest rate transitioned into positive territory by 1.32% following a moderation in the inflation rate to 20.68% in March, dipping below the prevailing interest rate of 22% since late June 2023. This marks the first instance of a positive real interest rate since January 2021, as reported by Arif Habib Limited (AHL).
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With inflation exhibiting a downward trajectory, prospects for a widening positive real interest rate in the future have heightened, prompting calls for interest rate cuts. The anticipation for such cuts has been mounting in financial markets for several months, deemed essential to facilitate bank financing at affordable rates, thereby stimulating industrial output and bolstering economic activities.
Despite the forward-looking positive real interest rate standing at 5-6% for the past few months, signaling optimism regarding a potential interest rate reduction, the central bank’s actions have deviated from market expectations. This deviation is attributed to the adherence to guidelines outlined by the International Monetary Fund (IMF) to maintain a stringent monetary policy under the ongoing $3 billion loan program.
The upcoming decision on whether to adjust the interest rate on April 29, 2024, holds significant intrigue, especially as Pakistan engages in negotiations for a new loan program by the end of June 2024. SBP Governor Jameel Ahmad underscored the impact of government decisions to raise gas prices, prompting the central bank to maintain the status quo on interest rates to mitigate inflationary pressures.
While Finance Minister Muhammad Aurangzeb noted a downward trend in inflation, suggesting an impending interest rate cut, analysts remain cautious. They highlight the need for sustained moderation in inflation, amidst other factors such as currency stability, global interest rates, and fiscal measures, to warrant significant monetary easing in the future.
Although recent inflation figures have aligned within the policy rate range and real interest rates have turned positive, the pace and sustainability of these trends will play a crucial role in shaping expectations for gradual easing in the coming quarters.
