Downward slide of policy rate continues as SBP cuts rate by 100 BPS

KARACHI - The Monetary Policy Committee (MPC) decided to reduce the policy rate further by 100 basis points to 7 percent, it was announced in a Monetary Policy Statement (MPS) after its meeting today.

According to statment released by SBP, this decision reflects "the MPC’s view that the inflation outlook has improved further, while the domestic economic slowdown continues and downside risks to growth have increased. Against this backdrop of receding demand-side inflation risks, the priority of monetary policy has appropriately shifted toward supporting growth and employment during these challenging times."

The policy rate has continued to decline since COVID-19 first emerged in Pakistan and has fallen from 13.25% in early March to 7% now. This is the fifth cut since March and marks a decrease of 625 points in a short span of 3 months, the steepest decline it has ever seen. With policy rate now at 7%, it is the lowest in the past 5 years.

"Consistent with its mandate, the MPC re-asserted its commitment to supporting households and businesses through the Covid-19 crisis and minimizing damage to the economy. In this context, the MPC felt that from a risk management point of view, a prompt response to downside risks to growth was called for given the improved inflation outlook. In addition, the MPC noted that with approximately Rs. 3.3 trillion worth of loans due to be repriced by early July 2020, this was an opportune moment to take action from a monetary policy transmission perspective. In this way, the benefits of interest rate reductions would be passed on in a timely manner to households and businesses," the statement said.

The MPC maintained that while COVID is spreading in many developing markets, risks to businesses remain high and in light of possible second waves of the virus, recovery remains uncertain. Earlier, the IMF had also downgraded its 2020 global growth forecast to -4.9 percent.

SBP in its MPS noted that while there was a surge in food prices during Ramzan and Eid, headline inflation continues to decline month on month. Furthermore, SBP feels that due to lack of new taxes, no increase in salaries, and no new import duties in Federal Budget 2020-21, inflation is expected to remain low. In light of this SBP feels comfortable in reducing interest rate by 100 BPS.

"With the current reduction of the policy rate to 7 percent, the MPC felt that real rates on a forward-looking basis (defined as the policy rate less expected inflation) would be kept close to zero, which is appropriate under the current circumstances," the statement added.