Staff Report
ISLAMABAD: The State Bank of Pakistan (SBP), in a meeting of its monetary policy committee (MPC) on Thursday, decided to slash the country’s policy rate by 100 points to seven per cent, the fifth time the central bank has reduced the interest rate in the last 100 days.
The decision was taken in light of the improved inflation outlook, “while the domestic economic downslide continues and downside risks to growth have increased”, said a statement released by the SBP. The rate cut is the fifth since the coronavirus pandemic hit the global economy, with the total reduction being 625 basis points.
The committee noted that risks to the global outlook are heavily skewed to the downside and the path of recovery remains uncertain. “The MPC also noted that in its update of the World Economic Outlook (WEO) released yesterday, the IMF downgraded its 2020 global growth forecast further to -4.9 per cent, 1.9 percentage points lower than in April, and projected a more gradual recovery than previously anticipated,” the statement reads.
The MPC further observed that the the economy is expected to recover gradually in the next fiscal year as lockdowns ease. However, “the recovery will depend critically on the evolution of the pandemic both in Pakistan and abroad,” the statement added.
The committee also noted that there had been an increasing take-up of SBP initiatives in recent weeks such as the 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,” said the statement.
The State Bank of Pakistan (SBP) on Thursday slashed its key interest rate by one per cent (100 basis points) to seven per cent in view of improved inflation outlook and domestic economic slowdown.
The decision to cut the policy rate was taken at a meeting of the Monetary Policy Committee (MPC).
The central bank in a statement issued after the meeting said the 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.
“Against this backdrop of receding demand-side inflation risks, the priority of monetary policy has appropriately shifted toward supporting growth and employment during these challenging times,” the statement read.
Consistent with its mandate, the State Bank said, the MPC re-asserted its commitment to supporting households and businesses through the Covid-19 crisis and minimising damage to the economy.
In addition, the MPC noted that with approximately Rs 3.3 trillion worth of loans due to be repriced by early July 2020, this was an opportune moment to take action from a monetary policy transmission perspective. In this way, the benefits of interest rate reductions would be passed on in a timely manner to households and businesses, the statement said.
“The MPC noted that the Covid-19 pandemic is spreading in many emerging markets, including Pakistan, and there are fears of a second wave in several other countries. It observed that risks to the global outlook are heavily skewed to the downside and the path of recovery remains uncertain.”
“In its update of the World Economic Outlook (WEO) released yesterday, the IMF downgraded its 2020 global growth forecast further to -4.9 percent, 1.9 percentage points lower than in April, and projected a more gradual recovery than previously anticipated.”
Notwithstanding a seasonal uptick in food prices associated with the Eid holiday, the SBP stated that headline inflation declined further to 8.2 per cent in May on the back of the recent cut in diesel and petrol prices. In addition, month-on-month inflation rates continue to be low.
“The FY2020-21 budget is also expected to be neutral for inflation as the freeze on government salaries, absence of new taxes, and lower production cost from reduced import duties should offset the decline in subsidies in some sectors,” it said.
