Businesses left devastated by less-than-expected rate cut

KARACHI: Economists and industrialists on Tuesday largely came hard on the central bank keeping the rate cut lower than the market consensus and that they said stood apart from a global response to coronavirus challenge and domestic ground realities of improving inflation outlook.

They are all unanimous that a nominal cut would not help in the prevailing circumstances, contrary to the market expectation of 100 to 200 basis points cut. Economist Asad Saeed said the currency is devaluing, and “within its framework, the central bank could not do much”.

“In my opinion the entire model is wrong. The inflation targeting does not give the right idea as we have supply-based inflation, not demand-pushed,” Saeed said. “The entire dynamics have changed under the Covid-19 pandemic. It wouldn’t matter if the central bank had reduced the rates by 300 basis points, because all the investment plans are being put on hold.”

The State Bank of Pakistan’s (SBP) reduced interest rate by 75 basis points to 12.50 percent for the first time after almost four years. Notably, more than 20 countries have slashed the interest rates to bottom, while US Fed cut it to zero, first time in their recent history.

However, KASB Securities Managing Director Arslan Soomro favoured the SBP’s decision. “US Fed is cutting rates massively so the carry-trade remains attractive. However, ease faster than necessary amidst a panic and you shall see more outflows and more pressure on currency, which would ensue undoing the medium term inflation target of 5-7 percent,” Soomro said. “The collapse in oil prices is here to stay in the new-normal range of $40-45/barrel after Russia/ Saudi eat US shale's market share. That is yet to be translated and easing can follow up in May as well. Why rush?”

Atif Zafar, chief economist of Topline Research said the rate cut was lower-than- expectations of one percent. “While the latest move by the SBP follows aggressive emergency rate cuts by its global counterparts to combat coronavirus pandemic that has jolted financial markets and the world economy, it falls short of street expectations,” Zafar said, citing a brokerage’s survey that found 80 percent of the fund managers were expecting 100 to 200 basis points cut in the policy rate.

The business advocacy body Pakistan Business Council (PBC) expected the monetary policy committee to “take a more objective view of demand-pull inflation, unfettered by the need to attract short-term fragile foreign investment in debt when it meets next and sooner than two months from now”.

“The call would then be for a further 200 bps cut in the policy rate down to 10.5 percent,” PBC said. “Continuing to hold local industry hostage to high borrowing rates in a bid to retain foreign debt comes at the cost of jobs, curtailment of profit and loss of tax revenue.”

Federation of Pakistan Chambers of Commerce and Industry President Anjum Nisar said the SBP’s decision seems totally against the global wisdom under the prevailing slowdown driven by Covid-19.

“Global think tanks and large number of countries are supporting economic activities by introducing ease of doing business and market expansion policies, while SBP is ignoring the current devastating conditions around the world that would affect Pakistan’s exports.”

Nisar added that there were strong reasons for lowering interest rates to single digits “as oil prices are seen continuously declining and inflation is also going down, hence significant cut in the interest rate has become essential,” to protect trade and industry.

Karachi Chamber of Commerce and Industry President Agha Shahab said the 75bps cut was a way below expectations of 200bps cut. “It would have been better to keep the status quo as such a nominal decrease would serve no purpose.”

Shahab said interest rates in Pakistan are highest in the region due to which local industry is already struggling to compete with the peers.

“I am sure the economists are also confused on the central bank’s approach,” he said. “It is time that the authorities take decision on the basis of ground realities. Bookish approach cannot be applied in every situation all the time. Authorities should bring the interest rates to single digit in order to keep the industry running and avoid further unemployment.”

Industrialist Ikhtiyar Baig said the lower rate cut causes disappointment among the entire business community, which was expecting a more significant cut in the key policy rates.

“The inflation has eased by around 200 basis points, and the central bank should have reduced the rates by around 200 bps,” Baig said. “It was a good opportunity to support the investment, stock market and overall business, and it was missed.” Analyst Khurram Schehzad said the central bank’s decision is not comprehendible.

“Inflation is going to go massively down, current account deficit is already down, and oil is declining to give benefit of about $8 billion,” Schehzad said. “We badly need fiscal support for masses, as consumption is going to be hit because people are now sitting home for an unidentified period. Hotels are closed, educational instructions are closed; airlines are going down, malls, cinemas and markets are closing down, then what will we achieve to keep rates so high.”