Interest Rates Slashed Again By SBP

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hafeez sheikh

In a surprise move, the State Bank of Pakistan; SBP has announced a reduction of policy rate to 9 percent from 11 percent. The policy rate has seen a cumulative reduction of 4.25% in recent weeks due to the uncertain situation of global and national economies.

The decision was taken in the emergency meeting of the Monetary Policy Committee that slashed the policy rate by a further 200 basis points to 9 percent.

This reduces forward-looking real interest rates (defined as the policy rate-less expected inflation) to around zero, which is about the middle of the range across most emerging markets.

The MPC was of the view that this action would cushion the impact of the Coronavirus shock on growth and employment, by easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability. It would also help ensure that economic activity is better placed to recover when the pandemic subsides.

The MPC highlighted that this rate cut would complement other measures recently taken by the SBP to support the economy, including concessional financing to companies that do not lay off workers, one-year extension in principal payments, doubling the period for rescheduling of loans from 90 to 180 days, and concessional financing for hospitals and medical centers incurring expenses to combat the Coronavirus pandemic.

Since the last MPC meeting, the global and domestic outlook has further deteriorated. The world economy is expected to enter into the sharpest downturn since the Great Depression, contracting by as much as 3 percent in 2020, according to projections released this week by the IMF. This is a much deeper recession than the 0.07 percent contraction during the global financial crisis in 2009.

Moreover, there are severe risks of a worse outcome. In addition, global oil prices have plummeted further, with futures markets suggesting low prices will persist. Domestically, high-frequency indicators of activity―including retail sales, credit card spending, cement production, export orders, tax collections, and mobility data from Google’s recently introduced Community Mobility Reports―suggest a significant slowdown in most parts of the economy in recent weeks.

On the inflation front, both the March CPI out-turn and more recent weekly SPI releases in April also show a marked reduction in inflation momentum.

 

 

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