SBP announces 100 bps reduction in policy rate to 8%

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SBP cuts policy rate 8%

The Monetary Policy Committee on 15th May, 2020 announced another cut in policy rate bringing down the rate to 8% from 9%. This is a the fourth policy rate cut since March 2020 bringing the rate cut from 13.25% in January to 8%, a total 525 basis points reduction. The finance ministry asserted that there are positive expectations from inflation figures in coming budget.

The coronavirus pandemic has been a great challenge for government as economic activities disrupted due to lockdown and spread of virus. The federal government and State Bank of Pakistan have been extremely responsive in terms of financial support for frontline workers, needy population and small and medium enterprises (SMEs). The steps taken by SBP to provide refinancing has increased credit flows, boost cash flow of borrowers and support the industries.

State Bank considered the following trends and external and fiscal sector’s conditions to reach current decision.

Key developments since last monetary policy

Since SBP’s monetary policy announcement on 16th April, there has been a nosedive trend in oil prices with more than 40% reduction. This has not only reduced fiscal deficit and import bills but also reduced inflation. Another notable change is the global trend of easing lockdown. Since past two weeks, several economies have announced easing down the lockdown amidst widespread protests by masses to open the economy. Pakistan also announced opening the economy on selected days and with strict SOPs.

Read More: SOPs for ease in lockdown in Sindh and Punjab

This ease in lockdown has changed State Bank’s perspective on looking at inflation and the current assessment for inflation remains around 11%-12% for this year and 7% to 8% for 2021. The foreign reserves position for Pakistan reached around US $12 billion. Large Scale Manufacturing declined by 23%, while steep decline was found in credit card use, cement sales, and POL sales.

The ministry of finance expects that opening of economy will lead to positive changes in consumption behavior of population. Moreover, the special incentives for construction industry will lead to uplift of construction industry and its allied industries which include cement and steel sector as well.

External Sector Outlook

The current account deficit of Pakistan has reduced significantly during the last month as imports declined considerably higher than exports. The imports declined by19.3% while exports reduced by 10.8%. The month of April saw further decline of 54% in exports however, the declining oil prices have reduced the external account burden for government. The finance ministry expects a better external sector account for Pakistan in coming period based on foreign portfolio inflows and international support in lieu of Covid-19 crisis.

Fiscal and Monetary outlook

The fiscal sector of Pakistan saw an account surplus of 0.4% in Jul-Mar 2020 against 1.2% deficit last year. Before March 2020, the tax revenues increased by 17.5%, however after March, the tax revenues declined by 15%. With financial stimulus announced by Imran Khan in March, the fiscal deficit is expected to increase in coming few months.

The monetary outlook for Pakistan in terms of inflation is two-fold as identified by Finance ministry. In case the situation in Pakistan does not goes out of hand, the inflation is expected to decline as per pre-coronavirus situation. However, in case economy picks up, inflation rate might increase in 2021. As for now, SBP expects a single digit to 10% inflation rate based on which 100 basis points reduction in policy rate is made.

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