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Business

Web Desk
April 16, 2020

SBP announces third cut amid virus outbreak, slashing policy rate to 9%

Business

Web Desk
Thu, Apr 16, 2020

KARACHI: The State Bank of Pakistan (SBP) on Thursday announced its third cut amid the ongoing pandemic crisis, slashing the policy rate by another 200 basis points to 9% given a forecast of slowdown in economic growth and rising inflation, as well as deteriorating conditions.

In a statement following the Monetary Policy Committee's (MPC) emergency meeting, the SBP said the move "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 MPC, according to the central bank, opined that the move would help dampen the economic impact of the COVID-19 pandemic, which is expected to hit growth and employment.

It would do so by "easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability" and making sure "economic activity is better placed to recover when the pandemic subsides.

"The MPC highlighted that this rate cut would complement other measures recently taken by the SBP to support the economy, including 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, and concessional financing for hospitals and medical centers incurring expenses to combat the Coronavirus pandemic," the statement added.

The SBP said its committee "remains ready to take whatever further actions become necessary in response to the evolving economic impact of the Coronavirus".

It also noted that the global economy would experience its "sharpest downturn since the Great Depression", shrinking as much as 3% in 2020, as per the International Monetary Fund's (IMF) projections. To understand the severity, the impact during the 2008 financial crisis was 0.07% contraction.

It said it had taken into account a reduction in international oil prices, as well as a suggestion via futures markets that the "low prices will persist". 

In Pakistan, "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 SBP added.

According to the central bank, the domestic economy was likely to decline 1.5% in ongoing fiscal year before  returning to 2% growth next year. "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," it mentioned.

"The inflationary impact of the recent exchange rate depreciation is expected to be contained given low import demand and falling global prices," it said in the statement.