State Bank just announced policy rate cut of 200 basis point bringing the rate from 11% to 9%. This makes a total of 425 basis point reduction of policy rate in one month. The decision has been taken in light of expected economic outfall of Large and Medium scale industry in Pakistan due to COVID-19. The reduction in policy rate is another step to provide relief to industrial sector in addition to the relief package announced by PM Imran Khan earlier.
This reduction in policy rate is not unexpected as the economic indicators for Pakistan, even before COVID-19, were signaling towards a single digit policy rate.
More here: Pakistan’s Interest Rate policy –Way Forward
Several factors have contributed to this decline in policy rate. The SBP has foresees the economy to contract by -1.5% while inflation is expected to be around 11% in FY20 and around 7%-9% in FY21. The continuous decline in oil prices despite OPEC deal, lack of demand for food supplies causing low inflation and estimated impact of COVID-19 on Pakistan’s economy are some of the factors that has made State Bank take the decision. With decline in policy rate, the finance ministry aims at reducing the economic shock of COVID-19, impact of supply disruptions on food and reduce borrowing costs for households and businesses.
The decision has been received very well by the business community as several businessmen including Arif Habib and Zubair Moti Wala thanked government for this significant step at this crucial time for businesses.
Download the State Bank Monetary Policy Statement here for 16th April 2020 (PDF Download)