KIBOR falls on inflation surprise; rate cut looms

Our Correspondent
Tuesday, Mar 05, 2024

KARACHI: The Karachi interbank offered rate (KIBOR) fell slightly across almost all maturities on Monday, as inflation eased more than expected in February, raising expectations of a cut in the central bank’s policy rate.

The State Bank of Pakistan (SBP) reported that the six-month KIBOR, a benchmark for lending and borrowing in the country, declined by 10 basis points to 21.59 percent. The three-month rate dropped to 21.63 percent from 21.70 percent on Friday, while the nine-month rate fell to 21.44 percent from 21.54 percent.

Analysts said the lower inflation numbers, which came in at 23.1 percent in February, down from 28.34 percent in January, boosted hopes for a rate cut, possibly as soon as this month. The SBP will hold its next monetary policy meeting on March 18. It maintained the policy rate at a record 22 percent in January, citing high inflation and external risks.

“There has been a slight downturn in the Consumer Price Index (CPI), with reported numbers registering at 23.1 percent, slightly lower than market expectations,” Chase Securities, a brokerage firm, said in a note. “This downward trend is expected to persist beyond March, potentially paving the way for future interest rate cuts.” The rate of inflation in February was the lowest in 20 months. It has decreased from its May 2023 peak of 37.97 percent, which was driven by a sharp depreciation of the rupee, higher food and energy prices.

The KIBOR data was released after Shehbaz Sharif, the leader of the Pakistan Muslim League-Nawaz (PML-N) party, was sworn in for his second term as prime minister of Pakistan on Sunday.

The newly formed government faces several challenges, including resolving the chronic problem of circular debt in the power sector, improving tax revenue collection, restructuring loss-making state-owned enterprises, and addressing the banking industry’s preference for investing in government securities rather than lending to the private sector.

Moreover, to increase government revenue, the International Monetary Fund (IMF), which has been providing financial assistance to Pakistan since July 2023, has started to suggest policies such as adjusting the income tax brackets for salaried individuals and imposing a general sales tax on some goods like petroleum products. It is unclear if these suggestions are a requirement for an upcoming third IMF review or part of a new program altogether.

“In March, inflation is anticipated to fall to around 20 percent, with core inflation slowing to 16 percent, bringing real interest rates into positive territory on a spot basis,” Optimus Capital Management, an asset management company, said in a report issued last week. The brokerage said the onset of Ramazan and a rise in fertiliser prices may again put pressure on food prices. “However, stable commodity and energy prices internationally, along with expectations of a steady PKR/USD exchange rate amid reduced demand and a likely successful entry into the next IMF program, will keep short-term inflation in check,” it added.