In a Monetary Policy Committee (MPC) on 25th June 2020, SBP cut the interest rate by further 100 basis points (bps) to 7% from 8%. This makes a total of 625 bps reduction in policy rate and a sixth rate cut consecutively this year. The rate cut by SBP is made in light of prediction of reduction in inflation rate which is already down to 8.2%. The slowdown of economy as a result of COVID-19 has been a major factor in negative GDP growth rate for Pakistan this year. In order to keep real interest rate from falling beyond negative zone, SBP will continue to adjust policy rate and thus, interest rate to generate some movement in purchasing behavior of consumers.
Read More: CPI drops to 8.2% in Pakistan
State Bank of Pakistan is continuously working towards supporting growth and employment during this crisis by introducing rate cuts and several loan schemes for SMEs and industries. An approximate of Rs. 3.3 trillion worth of loans are expected to be repriced by early July 2020 and to stimulate consumer spending and industrial production, SBP is keen on adjusting the interest rates to avoid deflation in future.
The spread of coronavirus is beyond Pakistan which has made World Economic Outlook to revise its previous prediction of global GDP further 1.9% down to -4.9%. This has already affected the trade between Pakistan and other countries and is expected to continue with second wave of COVID-19 already on the verge. SBP also highlighted that since government has added no new taxes or raise in salaries of government employees, a further downward trend in economic cycle, that was expected due to reduction in subsidies, will be minimized.
The month of May saw increase in prices of some food items specifically wheat, that to some extent offset the positive impact of huge reduction in oil import bill. However, with wheat imports to fill the gap and reduction of food item prices, the CPI inflation is expected to go beyond 6%. Moreover, industries like cement exports, automobile, food, textile and general retail will continue to see decline in production due to lower demand and thus, growth along with inflation will continue to decline.
FDI on the other hand, saw some improvement as it reached $2.4 billion with slowdown in portfolio outflows. A recent inflow of $725 million from World Bank and $500 million from ADB added to SBP’s current account which along with increased exports and lower imports brought current account to surplus after months. In consideration of all these factors, SBP continues to play its role in bringing stability in the economy through enhancing purchasing power of consumers by interest rate cuts.