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State Bank of Pakistan Cuts Interest Rate to 7%

by Staff Report

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Benchmark rate slashed fourth time in four months to help economy recover from impact of COVID-19

The State Bank of Pakistan on Thursday announced it was cutting the benchmark interest rate by 100 basis points, bringing it from 8 percent to 7 percent.

A statement issued after a meeting of the central bank’s Monetary Policy Committee claimed the decision reflected the committee’s view that the inflation outlook has improved further even though the domestic economic slowdown continues and “downside risks to growth have increased.” It added: “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.”

According to the central bank, the committee felt a prompt response to downside risks to growth was required given the improved inflation outlook. “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,” it added.

The statement issued by the central bank also acknowledges an update to the International Monetary Fund’s World Economic Outlook—released on Wednesday—in which the global fund 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.

The Monetary Police Committee noted that inflation had been largely brought under control, saying it had declined to 8.2 percent in May on the back of cuts in diesel and petrol prices. “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, adding that some supply shocks were expected but would likely be transitory given weak domestic demand.

“Average inflation could fall below the previously announced range of 7-9 percent for next fiscal year,” it said. “Looking ahead, the economy is expected to recover gradually in FY21, supported by easing lockdowns, supportive macroeconomic policies and a pick-up in global growth. However, risks are skewed to the downside and the recovery will depend critically on the evolution of the pandemic both in Pakistan and abroad,” it added.

According to the committee, SBP reserves declined to $9.96 billion on June 19, “largely due to debt repayments,” but had since recovered after receiving fresh disbursements from multilateral agencies, including around $725 million from the World Bank and $500 million from the Asian Development Bank. “Another $500 million is expected shortly from the Asian Infrastructure Investment Bank,” it 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,” it added.

This is the fourth time in four months that the central bank has slashed the interest rate; in March, it slashed the rate from 13 percent to 11 percent on calls from the business community, which was struggling to account for the economic impact of the lockdowns necessitated by the spread of COVID-19. In April, it slashed it further from 11 percent to 9 percent. Last month, it slashed it a third time from 9 percent to 8 percent.

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