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Countering corona impact: SBP unveils emergency 150bsp rate cut

By Our Correspondent
March 25, 2020

KARACHI: The central bank Tuesday slashed interest rate by 150 basis points — its biggest rate cut in over seven years — in an out-of-cycle emergency meeting, and pledged more support in future for the financial markets as part of aggressive measures to cushion the already flagging economy from the coronavirus fallout.

The State Bank of Pakistan (SBP) said the monetary policy committee (MPC) had decided to cut the policy rate by a further 150 basis points to 11 percent.

“This brings the cumulative easing over the past one week to 225 basis points,” the SBP said in a statement.

“The MPC was of the view that this cumulative easing would cushion the growth slowdown while protecting inflation expectations.”

Exactly last week, the central bank in its customary monetary policy meeting delivered a much-awaited interest rate cut of 75 basis points to 12.50 percent, the first after four years, though the move failed to cheer the market which was betting on a bigger rate reduction.

The SBP said it is in the process of taking necessary regulatory measures in coordination with banks to address pressures on cash flows of borrowers affected by coronavirus related disruptions through facilitating deferment and restructuring of their loans.

“The announcement of these measures is expected soon and will complement the action being taken by the MPC on interest rates today,” it said. “The MPC remains ready to take whatever further actions become necessary in response to the evolving economic impact of the coronavirus.”

Dreaded businessmen and analysts breathed a sigh of relief on the back-to-back rate cuts, which they said would come earlier as growth was seen tumbling.

“Right decision considering substantial impact on local inflation and growth due to lockdown,” Mohammed Sohail, chief executive officer of Topline Securities said.

Sohail, however, said the central bank move would result in extra pressure on rupee against the dollar “at a time when the US currency is already appreciating globally”. “However, the cut in interest rate will help government manage its fiscal book.”

Growth was forecast to fall below three percent this fiscal year from 3.3 percent last fiscal.

Industrialists want the rate to gradually come down to single digit.

“We were anticipating 300 to 400 basis points rate cut given the prevailing circumstances,” Zubair Motiwala, a renowned industrialist said.

“The cuts are welcome and we are grateful.”

Businessman Ikhtiyar Baig said it was a very positive step.

“A 100bps rate cut saves Rs200 billion on government debt obligations,” Baig said. “It would help contain current account deficit, while reduction in fuel prices would ease inflation.”

Khurram Shahzad, CEO of financial advisory firm Alpha Beta Core, said the rates had to come down.

“This would east government’s burden of debt significantly, while lower oil prices would result in annual saving of $3-4 billion,” Shahzad said. “A strategy is now needed to make the most of these savings so that the vulnerable sector is protected and employers are incentivised.”

The SBP said the MPC, in its last week’s meeting, noted considerable uncertainty about how the coronavirus outbreak would impact the global economy and Pakistan. It also said then that it stood ready to take further actions if and when needed as more information becomes available on the outlook for inflation and growth.

“Substantial new information on global and domestic developments has become available since the last MPC meeting,” the SBP said.

“Globally, the coronavirus has severely increased in reach. This has caused major disruptions to economic activity and the IMF (International Monetary Fund) has also significantly downgraded its global growth outlook for 2020 from 3.3 percent growth previously to below zero.”

The SBP said the global developments had also led to a sharp fall in international trade.

“On the domestic front, since the last MPC, the number of COVID-19 cases has increased considerably, prompting social distancing and curtailment of activity,” it added.

“This is expected to lead to noticeable slowdown in domestic demand.”

The SBP is expecting outlook for growth and inflation to be revised down further.