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Central bank says decision taken to reduce interest rate for second time in one month due to impacts of coronavirus
The State Bank of Pakistan (SBP) on Thursday announced it had slashed the interest rate by 200 basis points, bringing it from 11 percent to 9 percent.
In a Monetary Policy Statement issued by the central bank, it said that the decision to reduce the interest rate had been taken during an emergency meeting of the Monetary Policy Committee (MPC). “This reduces forward looking real interest rates (defined as the policy rate less expected inflation) to around zero, which is about the middle of the range across most emerging markets,” read the statement.
“The MPC was of the view that this action would cushion the impact of the coronavirus shock on growth and employment, including by easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability. It would also help ensure that economic activity is better placed to recover when the pandemic subsides,” it added.
According to the statement, the interest rate cut would complement other measures introduced by the central bank to support Pakistan’s economy during this crisis. In the past month, it has offered concessional financing to companies that do not lay off workers; one-year extension in principal payments; doubling of the period for rescheduling of loans from 90 to 180 days; concessional financing for hospitals and medical centers facing rising costs in fighting COVID-19 pandemic.
Noting that the global economy was expected to contract by as much as 3 percent in 2020, the State Bank said this was much worse than the 0.07 percent contraction during the global financial crisis of 2009. “Domestically, high-frequency indicators of activity―including retail sales, credit card spending, cement production, export orders, tax collections, and mobility data from Google’s recently introduced Community Mobility Reports―suggest a significant slowdown in most parts of the economy in recent weeks,” it said, adding that inflation had also dropped in the past month.
“The [Pakistan] economy is expected to contract by -1.5 percent in FY20 before recovering to around 2 percent growth in FY21. Inflation is expected to be close to the lower end of the previously announced 11-12 percent range this fiscal year, and to fall to 7-9 percent range next fiscal year,” it said. “The inflationary impact of the recent exchange rate depreciation is expected to be contained given low import demand and falling global prices,” it added.
This is the second time in one month 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.