Afghanistan Pakistan Trade Portal

    Pakistan cuts Interest rate by 150 basis points on demand slowdown

    The Monetary Policy Committee (MPC) of the State Bank of Pakistan, in its emergency meeting Tuesday, has decided to cut the key policy rate by a further 150 basis points (bps) to 11 percent effective March 25, 2020 to address the noticeable slowdown in domestic demand.

    This is the second reduction in the policy rate by MPC during last one week. Earlier, the MPC in its scheduled meeting held on March 17 reduced the policy rate by 75 bps from 13.25 percent to 12.50 percent as against the market expectations of some 200 bps cut. The 150 bps cut in interest rate has brought the cumulative easing to 225 bps from 13.25 percent to 11 percent over the past one week.

    The committee adopted a tight monetary stance for the last two years due to a rising trend in the headline and core inflation, higher current account deficit and depleting foreign exchange reserves. The key policy rate was stable at 13.25 percent since July 2019.

    According to SBP, recent developments on local and international fronts due to coronavirus (COVID-19) have implied that the outlook for growth and inflation in Pakistan is likely to be revised downward further. In the wake of this fresh information, the MPC agreed at its emergency meeting on Tuesday (March 24), to take further action.

    The Monetary Policy Statement said that substantial new information on global and domestic developments has become available since the last MPC meeting. Globally, coronavirus has severely increased in reach and this has caused major disruptions to economic activity.

    In addition, the International Monetary Fund (IMF) has also significantly downgraded its global growth outlook for 2020 from 3.3 percent to below zero.

    The SBP said that these global developments have also led to a sharp fall in international trade. On the domestic front, since the last MPC meeting, the number of COVID-19 cases has increased considerably; prompting social distancing and curtailment of activity and this is expected to lead to noticeable slowdown in domestic demand.

    The Monetary Policy Committee also discussed economic developments and observed that outlook for growth and inflation in Pakistan is likely to further down in coming months and finally decided another 150 bps cut in key policy rate in Tuesday’s meeting to support the economy.

    With this decision, SBP has decided to decrease its ‘Policy Rate’ (Target Rate) from 12.50 percent to 11 percent. SBP Overnight Reverse Repo (Ceiling) rate will be at 12 percent i.e. 100 bps above the SBP Policy Rate of 11 percent. While, the SBP’s Overnight Repo (Floor) rate will be at 10 percent some100 bps below the SBP Policy Rate.

    Accordingly, the Floor and Ceiling levels for the Interest Rate Corridor are 10 percent and 12.00 percent p.a. respectively i.e. width of 200bps. SBP said that it will continue to ensure that the money market overnight rate remains close to the SBP Policy Rate (Target Rate).

    The MPC also noted that SBP 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.

    The MPC has said that it will remain ready to take whatever further actions become necessary in response to the evolving economic impact of the Coronavirus.

    The MPC, in its last meeting on 17th March 2020, noted considerable uncertainty about how the Coronavirus outbreak would impact the global economy and Pakistan. The MPC, in the previous statement, also emphasized that it stood ready to take further actions if and when needed as more information becomes available on the outlook for inflation and growth.

    The MPC has taken further monetary policy easing decisions on same reasons, which were discussed in the previous meeting for a slight cut of 75 bps. The previous MPC meeting noted that the dominant development since January 2020 has been the outbreak of the coronavirus, which has taken a significant toll on human life around the world. The outbreak has also reduced external and domestic demand, while increasing risk aversion and uncertainty about the future. The last meeting also noted that global oil prices have plummeted, which if sustained, should help lower domestic inflation and improve the current account.

    Courtesy : Business Recorder