SBP reduces interest rate by 100 bps to 8 percent

KARACHI: The State Bank on Pakistan on Friday announced the new monetary policy and reduced the key policy rate by 100 basis points to eight percent.

The Monetary Policy Committee (MPC) said the decision was based on the inflation outlook has improved further in light of the recent cut in domestic fuel prices. As a result, inflation could fall closer to the lower end of the previously announced ranges of 11-12 percent this fiscal year and 7-9 percent next fiscal year.

The central bank highlighted that the coronavirus pandemic has created unique challenges for monetary policy due to its non-economic origin and the temporary disruption of economic activity required to combat it.

The decision has brought the cumulative reduction in the policy rate to 525 basis points, enabled by the fall in inflation since January and the expected further decline next fiscal year. The interest rate has dropped by 13.25 percent in mid-March to the current rate of eight percent.

The government has provided fiscal stimulus including has provided targeted support packages for low-income households, SMEs, and construction. The country has received assistance from the international community which will provide ample cushion to growth and employment while maintaining financial stability. This has provided relief and stability and should will support recovery as the pandemic subsides.

The MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation and is based on three key trends. First, the government has significantly reduced petrol and diesel prices by 30-40 percent in response to the continued fall in global oil prices, which has improved the outlook for inflation.

Secondly, the country has started easing lockdowns which should help provide support to economic activity. The situation remains highly uncertain. A possible rise in infections could prompt fresh lockdowns, and the recovery could prove more sluggish than is currently being anticipated.

Third, due to timely policy actions and international assistance, the initial volatility observed in domestic financial and foreign exchange markets has subsided in recent weeks, although global financial conditions remain considerably tighter than before the coronavirus outbreak.

The recent supportive developments have helped to restore the SBP’s foreign reserves position to close to pre-coronavirus levels of over US$ 12 billion.