State Bank delivers 200bps surprise rate cut to counter COVID-19 impact

KARACHI: The State Bank of Pakistan (SBP) on Thursday unexpectedly cut interest rates for the third time in less than four weeks to counter economic fallout from the coronavirus pandemic and also endorsed IMF’s projection of 1.5 percent negative growth this fiscal year.

SBP said the monetary policy committee (MPC), at its emergency meeting, decided to cut the policy rate by a further 200 basis points to 9 percent.

“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,” SBP said in a statement. “It would also help ensure that economic activity is better placed to recover when the pandemic subsides.”

State Bank said the forward looking real interest rates – policy rate less expected inflation – came down to around zero, “which is about the middle of the range across most emerging markets”. This has been the third reduction in policy rate since March 17, taking cumulative easing to 4.25 percent from 13.25 percent to address the worsening outlook of domestic economic activity in the wake of novel coronavirus outbreak.

Atif Zafar, chief economist at Topline Research said expected foreign inflows might have compelled the central bank to lower rate as “these will ease concerns over rupee”.

“We believe majority of the monetary easing for this year is behind us,” Zafar said. “The central bank is now likely to move given there is no major improvement in the economic activity due to the COVID-19 pandemic.”

The country is expecting foreign inflows from the World Bank, Asian Development Bank and International Monetary Fund (IMF), while it might get debt relief by G-20 for poor countries. Faizan Ahmed, head of research at BMA Research said the total reduction was the largest one month percentage point “cut ever in the recorded history of Pakistan”.

“Our initial impression is that longer lockdown and greater than expected slowdown during the rest of 2020 may force SBP to announce further rate cuts as well,” Ahmed added.

SBP said the 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 centres incurring expenses to combat the coronavirus pandemic.

State Bank revised downward growth and inflation outlook considering the severity and duration of the coronavirus shock. The growth forecast was similar to one released this week by the IMF. “The economy is expected to contract by -1.5 percent in FY20 before recovering to around 2 percent growth in FY21,” it said. “Inflation is expected to be close to the lower end of the previously announced 11-12 percent range this fiscal year, and to fall to 7-9 percent range next fiscal year.”

State Bank said upside risks to headline inflation in case of temporary supply disruptions or food price shocks are unlikely to generate strong second-round effects due to the weakness of the economy. “Similarly, the inflationary impact of the recent exchange rate depreciation is expected to be contained given low import demand and falling global prices,” it added. “(SBP) remains ready to take whatever further actions become necessary in response to the evolving economic impact of the coronavirus.”

SBP said the global and domestic outlook has further deteriorated since the last MPC meeting.

The bank said global oil prices have plummeted further, with futures markets suggesting low prices would persist.

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.

“On the inflation front, both the March CPI (consumer price index) out-turn and more recent weekly SPI (sensitive price indicator) releases in April also show a marked reduction in inflation momentum.”