SBP announces surprise 100 basis point rate cut

The State Bank of Pakistan (SBP), in a surprise monetary policy committee (MPC) meeting on Thursday, cut the interest rate by 100 basis points to seven per cent. 

Thursday’s cut is fifth in the last four months ever since the Covid-19 shark economic output and consumer demand following the shutdowns. 

“At its meeting on June 25, the MPC decided to reduce the policy rate by 100bps to 7pc. This 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,” the SBP’s monetary policy statement said in the announcement. 

“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 rate cut came immediately after the International Monetary Fund (IMF) issued its economic outlook for the current and next fiscal year. The SBP said “the MPC also noted that in its update of the World Economic Outlook released yesterday (Wednesday), the IMF downgraded its 2020 global growth forecast further to -4.9pc, 1.9 percentage points lower than in April, and projected a more gradual recovery than previously anticipated.” 

The SBP’s monetary policy decisions chase inflationary dynamics of the economy. Last year, when Pakistan’s inflation peaked at 14.6pc, the SBP had raised the interest rates to 13.25pc. However, with sharp demand contraction in the wake of Covid-19 on the global and Pakistan’s economies, the outlook for inflation improved significantly for calendar year 2020. 

With an improved CPI inflation outlook, the SBP embarked on monetary easing by cutting down interest rates. So far, Pakistan’s central bank has slashed interest rates by nearly 600bps or 6.25 percentage points since January. 

The monetary policy statement pointed out that “given the absence of demand-side pressures, average inflation could fall below the previously announced range of 7-9pc for next fiscal year.” 

“With the current reduction of the policy rate to 7pc, the MPC felt that real rates on a forward-looking basis (defined as the policy rate less expected inflation) would be kept close to zero, which is appropriate under the current circumstances.” 

The real interest rate is the difference between inflation and policy rate.

In addition to monetary easing, the SBP has also announced several schemes to facilitate businesses in carrying out their activities without disruption. The schemes include deferring Rs543bn worth of loans, restructuring another Rs94bn of debt and providing funds at concessional rates to vulnerable businesses allowing them to pay wages and salaries at time.