SBP cuts interest rate to 8 percent to help virus-hit economy

KARACHI: Pakistan’s central bank on Friday further cut the benchmark interest rate by 100 basis points to 8 percent, citing inflation outlook improvements as fuel prices are decreasing.
“The inflation outlook has improved further in light of the recent cut in domestic fuel prices. As a result, inflation could fall closer to the lower end of the previously announced ranges of 11-12 percent this fiscal year and 7-9 percent next fiscal year,” the State Bank of Pakistan said in its monetary policy statement.
SBP has emerged as the most aggressive central bank globally, having cut its key policy rate by 5.25 percent since March 17, as the country is struggling with the coronavirus outbreak and its economic growth is expected to fall to negative 1.5 percent.
SBP said the pandemic has created unique challenges for monetary policy due to its non-economic origins and temporary disruption of economic activity.
“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 bank said.
The economy of Pakistan is weakening as the industrial sector witnessed a steep decline of 23 percent (yoy) in March, and exports dropped by 54 percent in April amid business shutdowns to slow the virus spread.
According to SBP, the ongoing lifting of restrictions should help economic activity.
“Nevertheless, as elsewhere, the situation remains highly uncertain. If this easing proceeds smoothly, activity should pick up in coming months,” the bank said.
Financial experts argue there is still room for further cuts in the policy rate.
“The benchmark interest rate has almost reached its 19-month low. The cut in the interest rate will reduce the country’s debt burden by Rs330 billion,” Khurram Schehzad, senior financial analyst and CEO of Alpha Beta Core, told Arab News, as he added, “There should be more and timely cuts for these unusual circumstances.”
Pakistani industrialists and traders have called for further cuts to 5 percent.
“The SBP should bring down the interest rate to 5 percent, because the future expected inflation will further decline due to low demand and other effects of lockdowns,” said Mian Anjum Nisar, president of the Federation of Pakistan Chambers of Commerce and Industry.
According to SBP, inflation could fall further if economic activity fails to pick up as expected in the upcoming fiscal year, but it could also rise due to 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 bank said, as it declared its readiness to take appropriate measures, if need be.