Markets Anticipate SBP Interest Rate Cut on May 5

As the State Bank of Pakistan (SBP) prepares to unveil its monetary policy decision on May 5, market sentiment is firmly leaning toward an interest rate cut, with 69% of participants in a recent survey predicting a minimum 50 basis point reduction. The shift is stark, as expectations for a rate cut have surged, while those anticipating a status quo dropped to 31% from 38%, signaling growing confidence in monetary easing.

Among those expecting a cut, 37% foresee a 50bps reduction, 30% predict a 100bps cut, and a bold 2% anticipate a 150bps slash. This optimism is fueled by declining inflation, a strengthened rupee, and softer global oil prices, bolstering hopes for Pakistan’s economic recovery. Analysts project 6–7% inflation in FY26, allowing the SBP to ease rates by up to 200bps by year-end, maintaining real interest rates of 500–600 basis points, far above the historical 200–300bps norm.

Yet, caution prevails, with expectations of a rate hold in May due to domestic uncertainties and pending external inflows, including IMF disbursements tied to the first review of Pakistan’s programme, expected by June. The IMF has urged a tight monetary stance to anchor inflation expectations. Global risks, such as potential US tariffs, volatile oil prices, and a weaker dollar, alongside domestic budget adjustments and gas price hikes, add complexity. Rising six-month KIBOR and Treasury bill yields by 31–35 basis points since March further suggest a pause in easing.

Looking ahead, 95% of respondents expect the policy rate to fall to 10–12% by June, with 49% predicting 10–11% and 37% forecasting 8–10% by December. Inflation outlooks are brighter, with 53% expecting below 6% for FY25, aligning with projections of 4.5–5.5%, while external forecasts see 5% in FY25, rising to 8% in FY26. The rupee is expected to hold steady at Rs280–290 against the dollar for 60% of respondents.

The May MPC meeting is under intense scrutiny, with the SBP balancing external financing, fiscal risks, and inflation triggers. While a rate cut may be delayed, summer easing remains likely once IMF funds and budget clarity emerge, keeping markets cautiously optimistic.