PIBs, T-bills rally on rate cut expectations

Pakistan’s local currency bonds and treasury bills are rallying due to expectations of a further rate cut at the central bank’s upcoming monetary policy meeting this month amid manageable inflation and improving foreign exchange reserves, according to a brokerage report.

“The 10-year PIB yield has fallen below 11 percent for the first time in 4.5 years, while 3-months T-bills are near a 4-year low at 10 per cent; 6-month KIBOR is also at a 4-year low of 10.35 percent,” said Topline Securities in a note.

According to a recent poll conducted by the same brokerage firm, 80 percent expect a rate cut in the upcoming monetary policy meeting scheduled for January 26: 56.4 percent see a 50bps cut, 15.4 percent 100bps, 5.0 per cent 25bps, and 3.0 per cent expect a 75bps cut.

The brokerage house believes the shift in market perception for the interest rate outlook is driven by lower-than-expected inflation readings in the last two months, better-than-expected remittance flows, supporting external accounts, and largely stable rupee/dollar parity.

“We also expect the central bank to reduce the interest rate by 50bps to 10 percent. Our view is based on the factors mentioned above. Furthermore, the real rates based on average inflation for FY26 are currently around 350bps, higher than the historical average of 200bps,” the report said.

In December, the SBP reduced its benchmark interest rate by 50bps to 10.5 percent. This decision ended a four-meeting pause and was made in light of a stable inflation outlook and the goal of supporting economic growth.