SBP cuts key interest rate by 150bps to 11pc

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KARACHI: The State Bank of Pakistan (SBP) has decided to cut the country’s policy rate from 12.5pc to 11pc in an emergency meeting held on Tuesday.

This was a second rate cut in this month after the central bank slashed the rate from 13.25pc to 12.5pc last week.

According to the SBP, the Monetary Policy Committee (MPC) was of the view that this cumulative easing would cushion the growth slowdown while protecting inflation expectations.

In making this decision, the SBP has taken into account global and domestic developments, regarding the COVID-19 pandemic.  “The developments discussed imply that the outlook for growth and inflation in Pakistan is likely to be revised down further,” said the SBP.

On an international level, the virus has severely increased in reach. “This has caused major disruptions to economic activity and the International Monetary Fund (IMF) has also significantly downgraded its global growth outlook for 2020 from 3.3 per cent growth previously to below zero. These global developments have also led to a sharp fall in international trade,” said the SBP.

On the domestic front, since the last MPC, the SBP noted that the number of COVID-19 cases has increased considerably, prompting social distancing and curtailment of activity.

Sindh has imposed a lockdown for two weeks, while Punjab and Balochistan have imposed a partial shutdown.

“This is expected to lead to noticeable slowdown in domestic demand,” said the SBP. The MPC felt it was able to make these decisions, as in the last meeting it had emphasised that “it was ready to take further actions if and when needed as more information becomes available on the outlook for inflation and growth” due to uncertainty regarding the COVID-19 pandemic.

The MPC also said that SBP was in the process of taking necessary regulatory measures in coordination with banks to address pressures on cash flows of borrowers affected by coronavirus-related disruptions, through facilitating deferment and restructuring of their loans. These measures will be announced soon.

Last week’s decision to cut the policy rate by 75 basis points, from 13.25 per cent to 12.50pc was based on a lower predicted inflation forecast, but also a concern about the coronavirus pandemic and its potential impact on the external and domestic demand.

According to the State Bank, the average headline inflation is expected to remain within the 11-12pc forecast in FY20, before falling to the medium-term target range of 5-7pc. This is earlier than previous State Bank expectations.

National CPI inflation surged to 14.6 per cent in January 2020, before a deceleration in February 2020 to 12.4 per cent. Currently, the average national CPI stands at 11.7 per cent during the first eight months of FY20.

Analysts at the time had predicted a cut ranging from 50 basis points to 100 basis points. After the cut was announced, many had felt that the SBP should have reduced the policy cut further in light of the global pandemic.

This latest decision may appease both analysts and business people, along with the latest financing schemes, and changes in the banking industry – all due to fears about COVID-19.

The SBP had last changed the policy rate on July 16, 2019, to 13.25pc with a rise of 100 basis points. At the time, it cited increased potential inflation owing to a rise in utility costs.

The central bank further kept the policy rate unchanged in its reviews on September 16 and November 2 in 2019, and on January 28 in 2020. It then finally the policy rate to by 75 basis points to 12.5pc on March 17.

At the start of 2019, the policy rate was 10pc. Subsequent policy reviews – in January, March, May, and July – increased the policy rate by a total of 325 basis points.

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