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Friday July 25, 2025

SBP slashes policy rate for fourth time in two months

By Our Correspondent
May 16, 2020

KARACHI: The central bank on Friday delivered a rate cut of 100 basis points — its fourth in two months — as it sees inflation on a downward trend, while soft monetary policy is intended to shore up public finances in the time of lockdown-led economic disruption.

The State Bank of Pakistan (SBP) said the monetary policy committee decided to reduce the policy rate by 100 basis points to eight per cent as the inflation outlook improved further in light of the recent cut in domestic fuel prices and could fall closer to the lower end of the previously announced ranges of 11-12 per cent this fiscal year and 7-9 per cent next fiscal year.

“While easier monetary policy can neither affect the rate of infection transmission nor prevent the near-term fall in economic activity due to lockdowns, it can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption,” the SBP said in a statement. “In particular, the successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices. This has contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity.”

State Bank slashed its benchmark policy rate by 525 basis points to 8 per cent since March 17 in an emergency effort to offset economic impact of the novel coronavirus. SBP said the swift and forceful monetary easing of 525 basis points in the two months since the beginning of the crisis.

There were three key developments since the last monetary policy committee meeting on 16 April, 2020. The government significantly reduced petrol and diesel prices by 30-40 per cent in response to the continued fall in global oil prices, which improved the outlook for inflation.

SBP said the inflation outlook is subject to two-sided risks. “Inflation could fall further than expected if economic activity fails to pick up as expected next fiscal year,” it said. “On the other hand, there are some upside risks from potential food-price shocks associated with adverse agricultural conditions. Price pressures could also emerge if the economy gains greater momentum in the second half of FY21.”

The SBP said activity in service sectors and consumption, which form a large part of the domestic economy, could remain subdued for longer in light of preliminary evidence from China and other countries that eased lockdowns earlier than others. The central bank said there are potential downside risks given the economic difficulties across the world, especially in oil exporting countries, while remittances have so far remained resilient.

“Despite challenging global conditions, the outlook for external sector broadly remains stable,” it said. “The current account deficit should remain bounded and the recent fall in portfolio inflows will be offset by official flows committed by the international community, such that Pakistan’s external position remains fully funded. Together, these developments, buttressed by the flexible exchange rate regime, should continue to support a steady build up in the SBP’s foreign exchange reserve buffers.”

State Bank said the substantial fall in economic activity since March has significantly affected tax revenues. After rising by 17.5 per cent year-on-year during July-February FY20, tax revenues declined sharply by 15 per cent year-on-year in both March and April. “Moreover, given the needed increase in spending to support healthcare, businesses, households and more vulnerable segments of society, the fiscal deficit is expected to widen substantially in Q4.”