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State Bank of Pakistan Cuts Interest Rate to 8%

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

The State Bank of Pakistan on Friday announced it was cutting the benchmark interest rate by 100 basis points, bringing it from 9 percent to 8 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 in light of the recent cut in domestic fuel prices. “As a result, inflation could fall closer to the lower end of the previously announced ranges of 11-12 percent this fiscal year and 7-9 percent next fiscal year,” it said.

According to the central bank, an easier monetary policy could provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption. “In particular, the successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices,” it said, noting this had contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity

The coronavirus, and resulting global lockdowns, has badly hit economic activities. The lower interest rate on outlook for low inflation would help the economy recover by 2-3% next fiscal year compared to projected negative economic growth in range of 0.5-1.5% in the current fiscal year ending June 30, 2020.

The committee noted the swift and forceful monetary easing of 525 basis points in the two months since the beginning of the crisis, as well as the SBP’s measures to extend principal repayments, provide payroll financing, and other measures to support liquidity.

Together with the government’s fiscal stimulus―including targeted support packages for low-income households, SMEs, and construction―as well as assistance from the international community, these actions should provide ample cushion to growth and employment, while also maintaining financial stability, said the State Bank. “This coordinated and broad-based policy response has provided relief and stability and should provide support for recovery as the pandemic subsides,” it added.

This is the third time in three months that the central bank has slashed the interest rate; in March, it slashed the rate from 13% to 11% 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. Last month it slashed it further from 11% to 9%.

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