daily check

· The SBP adopts a cautious approach to monetary policy to ensure sustainable economic growth and reduces the policy rate by 100bps to 12%, against our expectation of a 200bps cut.

· On a positive note, the SBP revises downward its inflation forecast to a range of 5.5% to 7.5%, with the revised current account assumption expected to be in the range of a surplus of 0.5% to a deficit of 0.5% of GDP for FY25.

· We expect SBP to reduce interest rates by 250bps to 9.5% during the remainder of CY25 with most of the easing in 1H.

SBP adopts cautious approach for 100bps cut: SBP monetary policy committee cautiously approached monetary policy to ensure sustainable economic growth and cut policy rate by 100bps to 12%, against our expectation of 200bps. This decision is based on continuous disinflationary trend driven by moderate domestic demand and supportive supply side dynamics. However, core inflation is still at an elevated level and impact of 1,000bps cut in policy rate will continue to unfold to support economic activity. The central bank assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the range of 5-7%.  

Inflation estimates nearly halved: The central bank has revised its inflation forecast for FY25 to be in the range of 5.5% to 7.5%, compared to earlier estimates of 11.5% to 13.5%. Despite the volatility, the committee expects inflation to remain close to the upper band of the target range toward the end of FY25. However, the committee highlights that the inflation outlook is subject to risks from global commodity prices, protectionist policies in major economies, the timing of administered energy tariff adjustments, perishable food prices, and any potential hikes in taxes.

Current account likely to end up in surplus for FY25: The central bank has revised its current account balance estimate for FY25 to a surplus and a deficit of 0.5% and 0.5% of GDP, respectively, from the earlier projection of deficit of 0% to 1%. This revision is driven by a robust increase in workers' remittances and exports, amid controlled imports. During 1HFY25, the current account surplus was recorded at US$1.2bn, as remittance inflows more than offset the widening trade deficit. Meanwhile, financial inflows, which remained weak during the first half, are expected to pick up pace in the second half. Consequently, the improved current account outlook, along with stronger financial inflows, is expected to raise SBP forex reserves to US$13bn by Jun’25.

Interest rates to fall to single digit in CY25: We expect the SBP to continue monetary easing, given the high positive real interest rates in disinflationary environment, a controlled Current Account Balance with stable currency, and contraction in money supply. Inflation is anticipated to continue disinflationary trend in Jan’25 due to deflation in food. As a result, we project positive real interest rates for Jan’25 at 9.31% and over 6.0% based on our 12-month forward inflation forecast. Accordingly, we expect the MPC to reduce interest rates by 250bps gradually to 9.5% during the remainder of CY25 with most of the easing in 1H.

Equities to remain in limelight: Falling returns from alternative investments are expected to make equities the preferred asset class in 2025. Furthermore, the focus on structural reforms and tight fiscal and monetary policies under the IMF program is expected to improve the investment climate and support market rally. We recommend an overweight stance on sectors poised to benefit from monetary easing, structural reforms, and declining commodity prices.