By Muhammad Luqman
The State Bank of Pakistan (SBP) Thursday cut its key interest rate by two percent bringing it to the single digit level of 9 percent.
The State Bank’s Monetary Policy Committee announced their decision in a statement to cut the policy rate by a further 200 basis points to 9 percent. 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, according to English newspaper, The Business Recorder.
The interest rate has been reduced keeping in view economic downturn due to the coronavirus epidemic in the country. The interest rate declined by 4.25 percent during one month.
1/In response to a marked reduction in growth and inflation projections due the Coronavirus pandemic, MPC decided at its emergency meeting today, to cut the policy rate by a further 200 basis points to 9 percent. https://t.co/FOfAQ7Y1bX
— SBP (@StateBank_Pak) April 16, 2020
Earlier, the SBP announced that it will provide loans to health facilities on 3% markup to counter coronavirus outbreak. The SBP declared that inflation rate will come down in the coming months while the prices of petroleum products will also decrease.
In January, the SBP left the interest rate unchanged at 13.25 percent. The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools the central bank uses to ensure price stability in the economy.
“The world economy is expected to enter the sharpest downturn since the Great Depression, contracting by as much as 3% in 2020, according to projections released this week by the IMF. This is a much deeper recession than the 0.07% contraction during the global financial crisis in 2009,” the SBP said in a statement.
Pakistan’s economy is expected to contract by 1.5% in the fiscal year ending June 30, 2020, the bank added. “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,” the bank said.
On March 17, the central bank cut rates by 75 basis points. As more and more countries went into lockdown to contain the spread of Covid-19, the world economy came to a grinding halt, which changed the growth outlook, forcing the SBP to cut the rate by another 1% on March 24. The latest rate cut comes after the IMF and World Bank warned of a recession.
“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.” the SBP said. “The Monetary Policy Committee 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.”
The SBP says the latest rate cut will help ensure that economic activity is better placed to recover when the pandemic subsides. Reducing interest rates can cause inflationary pressure, but the SBP said there was a marked reduction in inflation momentum in March and also in the weekly sensitive price index in April.
“Inflation is expected to be close to the lower end of the previously announced 11-12% range this fiscal year, and to fall to 7-9% range next fiscal year,” the bank said. While there are some upside risks to headline inflation in case of temporary supply disruptions or food price shocks, these are unlikely to generate strong second-round effects due to the weakness of the economy, it added.
