MPC: caution against rushing rate cuts
The objective is to revive economic growth and generate employment. The core question is whether private credit will rebound enough to create growth momentum. The chances are not high. Although interest rates have already halved from their peak, there are few signs of direct growth through private credit, either producer or consumer. More important bottlenecks, such as higher taxation and energy prices, continue to suppress demand. Additionally, the removal of wheat support prices keeps rural demand in check.
However, there are risks to cutting rates too quickly. There is an intrinsic link between interest rates and exchange rates: keeping rates high reduces pressure on currency depreciation, and vice versa. Already, the currency is depreciating. Recently, authorities have tried to persuade exchange companies and banks not to let the PKR/USD parity slide. It would be wiser to proceed cautiously to avoid panic in the currency market.
Another question is why demand is not picking up, and whether lowering interest rates further can trigger growth. Private credit remains low. Most industries already have excess capacity, so few are interested in expansion, and working capital needs are limited. Auto loan demand, historically highly correlated with interest rates, is suppressed by the SBP's auto credit limit of Rs 3 million and a three-year loan tenor. The SBP does not want a surge in auto loans. Furthermore, the government has maintained high taxes on cars imposed after the 2022 crisis.
Most areas of demand are indirect. Lower interest rates can shift investment from low-risk classes (such as fixed income) to riskier avenues such as the stock market, real estate, and commodities trading. The stock market is booming, but even with rates cut in half, real estate remains stagnant, likely due to higher taxation. Stocks are already taxed and are being re-rated, but the case is the opposite for real estate trading. When real estate prices rise, construction typically improves as well. Further lowering rates may not boost construction or revive growth in the steel and cement sectors.
In food commodities, there are signs of hoarding as the opportunity cost of holding inventory is lower. This is evident in the recent increase in sugar prices, and wheat is likely to follow. The government does not have sufficient stocks, and a domestic supply shortfall looms. Prices are expected to rise after September. Lower rates strengthen this thesis which is not good for forward looking inflation.
One sector that benefits significantly from lower rates is textiles. Margins are squeezed due to higher taxation, but lower rates improve net margins for leveraged companies. Additionally, lower rates may allow the currency to depreciate, benefiting exporters. However, the key to export growth is the US tariff policy toward Pakistan relative to other competitors. It is wise to observe how these tariffs develop.
Another important indicator for the currency is the interest rate differential between the US and Pakistan, which is already below the historical average. The US is expected to begin cutting rates soon. It is best to monitor both US interest rates and trade tariffs before advocating single-digit rates at home.
In summary, the target of generating growth argues for rate cuts, but there are doubts, especially given the risks of inflation resurgence. Food commodity prices (especially sugar and wheat) are likely to rise, potentially boosting rural demand. In urban areas, wage pressures, particularly in the services sector, persist. The incentive to hold dollars may increase as rates fall, with importers anticipating further currency depreciation, given declining foreign currency borrowing. This trend may accelerate.
The current account could come under pressure, and banks are already delaying letters of credit (L/C) issuance. These delays could increase, prompting more administrative measures to keep the external account and currency stable, which may not be healthy for the market overall. The SBP should adopt a measured approach in its upcoming policy review on Wednesday, favoring a wait-and-see stance.
Copyright Business Recorder, 2025
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
5 hours ago
- Business Recorder
‘Agri development, farmer prosperity are top priorities of CM'
LAHORE: Minister for Agriculture Punjab, Syed Ashiq Hussain Kirmani, has stated that agricultural development and farmer prosperity are among the foremost priorities of the Chief Minister Punjab. The present government is implementing revolutionary programs aimed at uplifting the agriculture sector and ensuring farmer welfare, which have already begun yielding positive outcomes across the province. However, some elements are attempting to distort the facts and spread misconceptions regarding these historic initiatives of the Punjab government. Minister Syed Ashiq Hussain Kirmani highlighted that within just one month of taking office, the Chief Minister Punjab initiated multiple agricultural development programs worth Rs. 400 billion — f or the first time in the history of Province. These programs included interest-free loans worth of billions of rupees through Kisan Card, provision of thousands of tractors on subsidy under the Green Tractors Program, and provision of modern agricultural machinery with up to 60% subsidy and many other initiatives. He added that this is the only Government in Pakistan's history during which no fertilizer shortage has been witnessed. Fertilizer is available in abundance in the market at prices even lower than those fixed by the manufacturers. Artificial shortages, profiteering, and hoarding of fertilizers have been completely eradicated from the province. He clarified that, during the current season, all provincial governments ceased official wheat procurement under the IMF agreement; however, Punjab remains the only province that extended direct financial support of Rs. 14 billion to small wheat farmers. During just a short period of two months, more than Rs. 85 billion in interest-free loans have been disbursed to farmers across Punjab for the purchase of fertilizers, seeds, and pesticides for Kharif crops. Of this amount, farmers have already utilized over Rs. 45 billion for the purchase of fertilizers, pesticides, and diesel. Syed Ashiq Hussain Kirmani further elaborated on the landmark programs launched during the current fiscal year for the welfare of farmers and agricultural advancement. These include Rs. 200 billion in interest-free loans through the Kisan Card, subsidized provision of 20,000 tractors, solarization of over 10,000 agricultural tube wells, establishment of 10 model agriculture malls, recruitment of 2,000 young agriculture graduates to provide technical support in the field, improvement and lining of watercourses, and a Rs. 30 billion program for the distribution of modern agricultural machinery. Copyright Business Recorder, 2025
Express Tribune
5 hours ago
- Express Tribune
Time to keep rates unchanged
Pakistan's real long-term growth won't come from slashing rates prematurely; it will come from shifting the engine of growth towards productivity, not consumption. Photo: file Listen to article The State Bank of Pakistan (SBP) is set to announce its monetary policy decision on July 30, and all eyes will be on whether it cuts interest rates again or chooses to hold. In my view — as an analyst tracking macroeconomic and capital market signals closely — no change is warranted at this point. Pakistan has already seen a dramatic reversal in policy rates — from a staggering 22% to a relatively benign 11% as of May 2025. That's not just a rate cut; that's a full-blown pivot. While this brings welcome relief to borrowers and a much-needed growth stimulus, macroeconomics doesn't respond overnight. A monetary easing of this magnitude usually takes two to three quarters to trickle into the real economy. A premature cut now would be like offering dessert before the main course has even been served. Let's not overfeed an economy still digesting the last policy meal. The YoY inflation dip into the low-to-mid 3% range in recent months has largely been driven by the base effect, not necessarily a fundamental deceleration. With energy tariff adjustments, expected global commodity swings, and reduction in remittance incentives, inflation is likely to re-enter the 7-9% band by year-end. SBP's long-term inflation target band of 5-7% is admirable, but it must also guard real interest rates — ideally 3-5% positive — to sustain current account balance, contain imports, and maintain currency stability. History has shown that dipping below this zone leads to overheating, demand-pull inflation, and pressure on external buffers. We can't afford to repeat that cycle again. Don't light the fuse in year three SBP Governor Jameel Ahmad has repeatedly spoken about avoiding the boom-and-bust mistakes of the past — and he's right. The third year of any macro stabilisation programme is the most vulnerable: the temptation to cut too early is strongest, the political cycle begins to heat up, and the reserves appear deceptively comfortable. But here's the catch — Pakistan's FX reserves, while improved, are still largely propped up by bilateral rollovers, multilateral support, and deferred repayments. This is not the time to fire the bazooka. Instead, it's time to keep a measured hand on the lever, especially as tariff rationalisation under the new National Tariff Policy (NTP 2025-30) continues to lower energy costs for export-oriented industries. Cheaper electricity and gas — if passed on to the right sectors like IT, mining, value-added agriculture, light manufacturing and services — can help Pakistan grow its exports, climb global supply chains, and attract long-term FDI. Let exports earn the right to cut rates. Let Moody's and S&P reward discipline with credit upgrades. Let credit default swap spreads tighten, PIA and ZTBL get privatised, and DISCOs become financially viable. That's when we'll have truly earned macroeconomic space for deeper cuts. Remittance risk: the sleeping volcano Another red flag that must not be ignored is the government's rollback of incentives on incremental remittances — a move that could seriously dent the current account. The Rs200 billion ($700 million) subsidy in previous years catalysed nearly $8 billion in incremental inflows — a 10x multiplier by some measures. Removing this carrot risks not just a slowdown in remittances but also a hit to FX reserves and rupee stability. If remittances stall, and imports rise as expected (especially due to reduced duties on used cars and improved cotton harvest conditions), we could see import bills swell by 15-20% over the next two years, or $9-12 billion higher by FY27. Even with gradual 3-4% annual rupee depreciation, strong export growth and a 1-2% current account deficit might be manageable – but only if we resist the urge to cut early. Better tools than rate cuts Instead of cutting rates broadly, the SBP should fine-tune credit where it's needed most: a) Increase auto financing limits to support local manufacturers threatened by rising used car imports. b) Expand low-cost housing schemes to revive construction and employment. c) Enhance subsidised student and SME loans, especially in high-impact sectors like IT, logistics, and value-added exports. d) Scale up green financing tools, particularly EV loans, solar leasing, and youth/agribusiness schemes under PM's programmes. These targeted tools are far more effective than blunt rate cuts, and crucially, they don't unleash import-led growth. Time to hold Pakistan's real long-term growth won't come from slashing rates prematurely. It will come from shifting the engine of growth towards productivity, not consumption. That means: Strengthening local linkages in mining and agricultural exports; promoting value-added manufacturing with predictable energy and logistics policies; deepening integration into global IT and services value chains; and clearing fiscal clutter, like privatising loss-making state enterprises, to finally create room for sustainable interest rate compression. In the end, monetary policy is not a magic wand. It's a signal. And right now, the best signal SBP can send to global investors, credit agencies, and Pakistanis alike is stability, prudence, and patience. Because when you're walking a tightrope, the smartest thing you can do — is not jump. The writer is an independent economic analyst
Business Recorder
6 hours ago
- Business Recorder
A 100bps cut in policy rate on the cards?
Following a recent visit to the Federal Reserve to inspect a renovation project, the tension between US President Donald Trump and Fed Chairman Jerome Powell was apparent. The future of Powell's position remains uncertain, as both appeared tense during their media presentation. When questioned about the Federal Reserve's renovation exceeding its budget, Trump remarked he would dismiss an employee over it but saw no need to fire the Fed Chairman. Despite a friction between them, the US dollar strengthened, buoyed by the market's confidence following Trump's assurance that Powell would not be let go. Meanwhile, June's durable goods data was disappointing due to weak orders for transportation equipment; it still exceeded expectations, contributing to Dollar's recovery. This weakness primarily stems from tariff pressures rather than other factors. Last week, both existing and new home sales figures fell short of market predictions, placing builders, buyers, and sellers under pressure in a housing market that plays a crucial role in the US economic cycle. Additionally, flash manufacturing PMI readings were weaker than anticipated. The Beige Book indicated that most Federal Reserve districts are experiencing modest growth in lending. Although there were some slight downward revisions, the overall situation remains tense due to persistent inflationary pressures and tariffs. The Federal Reserve's meeting on Tuesday and Wednesday is expected to maintain its current policy stance. It appears that the Fed may be gradually moving toward a rate-cutting cycle. Importantly, the looming August 1 deadline cannot be overlooked. Many of the analysts are predicting that the passing of tariff costs will soon impact consumers due to lag effects, potentially also affecting the labour market. However, there is a possibility for compromise between the US administration and the Federal Reserve. As the tariff situation stabilizes, Powell might hint at a data-driven rate cut in September as a conciliatory measure. As expected last week, the European Central Bank decided to keep its interest rate steady at 2%. With the pause in rate adjustments continuing, the ECB reiterated that its decisions will remain data-driven, making it clear that any future changes in interest rate policy will only be determined during meetings, without early commitments to a particular direction. This week is filled with significant economic reports from around the globe. Key US indicators to monitor include the 2nd quarter GDP, Personal Income and Spending (PCE), Non-Farm Payroll, and Consumer Confidence. In the meantime, the market is gearing up for a crucial week as six Central Banks prepare to announce their interest rate decisions. The State Bank of Pakistan (SBP) will share its policy rate on Wednesday. Except for the SBP, all the other banks are expected to keep their rates unchanged. GOLD @ $ 3337.50— This week, market is expected to see volatility. To move higher, gold must surpass $ 3360 to reach $ 3388 or potentially more. However, if it falls below $ 3302, it could decline to $ 3258 or even $ 3226. EURO @ 1.1742— Euro has strong support at 1.1610 and is expected to remain above this level. If it breaks through 1.1820, it may make a move toward 1.1895. Or else 1.1550. GBP @ 1.3439— Pound Sterling will continue to face pressure unless it surpasses 1.3570 to reach 1.3620. The risk of decline will rise if it breaks below 1.3280. JPY @ 147.67— There may still be some losses, but the USD needs to hold 146.20 to make some recovery. If it can break above 148.90, it will pave the way for testing the 150 levels. If not, watch for a drop to 145.40. SBP meeting today Last week, there was a notable change in the Pakistani foreign exchange market, a rarity in recent times, as the Rupee strengthened against the US Dollar. On Monday, it was around 285 to 1 USD, but by Friday, the SBP closed at 283.4539. It is said that administrative measures helped PKR to gain some strength. The future trend continues to be uncertain. Analyzing the data, it appears that Pakistan's economy is on an upswing. This can be supported by various metrics, for instance, the country's debt and deficit ratios indicate a stronger economic position compared to some emerging and advanced economies. The region's challenges, however, play a significant role. For comparative purposes, consider certain European nations that may hold their credit ratings despite underlying risks. Pakistan's geographical context and lack of diversity similar to weaker European economies further differentiate its situation. Additionally, geopolitical conditions have shifted considerably. After three years of struggles, Pakistan's overall foreign exchange reserves are nearing $ 20 billion, with SBP's FX Reserves at $ 14.46 billion. The current account balance and the payments position are consistently positive, with remittances steadily increasing. The International Reserve and Foreign Currency position (Derivatives) stands at $ 2.6 billion, while the CDS has sharply fallen by over 1200 basis points. Pakistan's international Euro and Dollar bonds are recovering from previous lows, and last week's credit rating improvement by S & P to B- reaffirms the progress in the economy. Nevertheless, the primary challenge lies in sustaining and enhancing these economic gains. This can be achieved by energizing economic activity and boosting liquidity via the banking sector, significantly increasing credit availability to the private sector. However, this alone may not be enough unless the tax-to-GDP ratio needs to be raised significantly. Despite these encouraging signs and with oil prices around $ 70 per barrel, the Pakistani Rupee should not have depreciated and should have remained stable. A stable PKR will assist the administration and monetary authorities in keeping inflation low, enabling the monetary policy committee to potentially lower the policy rate in alignment with inflation trends. Given these considerations, policymakers on Monday July 28, might think about reducing the interest rates by nearly 100 basis points. Copyright Business Recorder, 2025
