State Bank of Pakistan cuts policy rate by 100 bps to 7pc

SBP and FIA to take joint action

KARACHI: The State Bank of Pakistan (SBP) on Thursday announced that it is further reducing the policy rate of the country by 1 percent, bringing it to 7 percent.
The rate cut is the fifth since the coronavirus pandemic hit the global economy, with the total reduction being 625 basis points, as it has been decreased from 13.25 percent to 7 percent.
According to a press release issued by the central bank, SBP’s Monetary Policy Committee (MPC) met on Thursday and agreed to reduce the policy rate by 100 basis points to 7 percent.
“This decision reflected the MPC’s view that the inflation outlook has improved further, while the domestic economic slowdown continues and downside risks to growth have increased,” said the central bank.
The SBP further justified its decision by saying that the MPC took the decision against the backdrop of receding demand-side inflation risks. It added that the bank’s priority of monetary policy has been appropriately shifted towards supporting growth and employment during challenging times of coronavirus.
The committee noted that it was an “opportune moment” to take action from a monetary policy transmission perspective as “approximately Rs3.3 trillion worth of loans are due to be re-priced by early July 2020”.
“In this way, the benefits of interest rate reductions would be passed on in a timely manner to households and businesses,” said the statement.
The MPC also noted that IMF in its latest report has downgraded its 2020 global growth forecast further to -4.9%.
The MPC also noted that domestically headline inflation declined further to 8.2% in May on the back of the recent cut in diesel and petrol prices. It also stated that month-on-month inflation rates also continue to be low.
The committee shared that the upcoming budget for the fiscal year 2020-21 is also expected to be “neutral for inflation” due to the freeze on government salaries, absence of new taxes, and lower production cost from reduced import duties which it said should offset the decline in subsidies in some sectors.
However, the MPC admitted that there may be some supply shocks which may lead to some volatility in inflation, but believed that those shocks would likely to be “transitory” because of weak domestic demand.
“With the current reduction of the policy rate to 7 percent, the MPC felt that real rates on a forward-looking basis (defined as the policy rate less expected inflation) would be kept close to zero, which is appropriate under the current circumstances,” said the statement.
“Today’s decision brings the cumulative reduction in the policy rate since mid-March to 625 basis points, commensurate with the decline in inflation during this period,” said the statement.
The MPC noted that the take-up of several other SBP initiatives has risen significantly in recent weeks, notably concessional refinancing facilities to protect employment and support the health sector as well as regulatory measures to provide debt servicing relief.
“Together, this strong and data-driven monetary policy response should support growth and employment, while keeping inflation expectations anchored and maintaining financial stability,” concluded the meeting. – TLTP