State Bank cuts policy rate by 75 bps for March 2020 Analysts are not happy!


Yesterday, on 17th March 2020, SBP announced its monetary policy with a rate cut of only 75 basis points as opposed to higher expectations of 150 to 200 bps by analysts and fund managers. The policy rate is now down to 12.5% from 13.25% earlier.

Why were we expecting major cuts in SBP policy rates in March 2020?

There were several factors that led investors and analysts to believe that rate cut would be further down providing some relief to stock market and industries in general. The lower target inflation for 2020, sharp decline in oil prices, absorption of economic shocks by previous policy rates were some of the factors that fund managers had incorporated in their forecast and even had it reflected in 10-year bond yields. Read detailed analysis of monetary policy forecast here.  Moreover, the global rates cut by major developed economies like USA (↘1%), Australia (↘0.25%), Canada (↘0.50%) and even struggling economies like Egypt (↘3%), has been another factor contributing to expectations of high rate cuts.

How does State Bank Justifies its Policy Rate?

State Bank’s Governor Reza Baqir emphasized that lower interest rates are not the only solution to the global crisis of COVID-19 and markets in Pakistan need to rely on its improving fundamentals instead of policy rate cuts. He also asserted that SBP will make policies to make sure that industries do not halt their production and exports keep rising. Some of the important steps taken by SBP policy yesterday need to be highlighted here.

Making Interest Rate Corridor Symmetric

SBP in its latest monetary policy announced to make interest rate corridor symmetric around the policy rate. The interest rate Ceiling (Overnight Reverse repo) rate is set at 13.5%, 100 basis points higher than policy rate while the Floor rate will at 11.5%, 100 basis points lower than policy rate, keeping the width of 200 basis points for the corridor. Earlier the rates could vary within the 200 bps of policy rate. This policy change would ensure that ceiling and floor rates are close to policy rate.

Read More about Interest Rate Corridor here.  

Subsidized Loan for Industry to Cope with crisis of COVID-19

SBP also announced a Temporary Economic Relief Facility (TERF) for purchase of new plant or machinery for new setups. This long term finance facility is available with maximum limit of Rs.5 billion at interest rate of 7% per annum. The aim is to help industries cope up with any negative impact of Coronavirus on their businesses.

Subsidized Loan for Hospitals and Medical Centers in wake of COVID-19

Another great move by SBP is providing a refinance facility for hospitals and medical centers under their Refinance Facility for Combating COVID-19 (RFCC). The facility will provide maximum financing of up to Rs.200 million per hospital or medical center to purchase imported or local medical equipment to deal with the COVID-19 virus. The interest rate for RFCC is only 3% per annum with SBP refinance rate of 0% and total amount allocated for this facility is Rs. 5 billion.

These subsidies are in addition to the prevailing Long Term Finance Facility (LTFF) and Export Refinance Facility (ERF) by SBP.

Outflow of Hot Money and FDI

There is a global panic among investors who are pulling out money from investments made in different countries to keep themselves liquidated for crisis. While Pakistan is also expecting lower FDI in coming days, Pakistan has already increased its foreign exchange reserves by around $10 billion during FY19. The hot money that came to Pakistan is hardly $2 billion and any withdrawal from foreign investors under current circumstances does not affect monetary policy of Pakistan.

SBP is still Positive on Economy’s Fundamentals

The monetary policy of SBP is also based on factors like revision of GDP growth rate to 3% from earlier 3.5% projection in wake of any negative impact on exports. However, Governor SBP Reza Baqir suggested that imports of the country are also expected to decline if movement of goods across the borders keep plunging worldwide and therefore, Pakistan is expected to be less vulnerable economically. Moreover, the rate cuts by developed economies like Australia or USA did not supported levels in stock exchange as was expected by policy makers and same could have been a case with Pakistan and therefore, at current policy rate of 12.5%, investors still have a chance to avail higher savings rates by banks and mutual funds.

Expectations of a Single Digit Policy Rate by end of FY2020

Despite less than expected policy rate cut, the analysts are still looking at single digit policy rate by end of FY20 based on increased Foreign Exchange reserves, decline in oil prices (around 30% till date), estimated global impact of COVID-19 on economies by financial bodies like ADB (0.01% of GDP for Pakistan) and lower estimates of inflation in coming months.


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