KARACHI: The State Bank of Pakistan (SBP) on Thursday slashed its key interest rate by one per cent (100 basis points) to seven per cent in view of improved inflation outlook and domestic economic slowdown.
The decision to cut the policy rate was taken at a meeting of the Monetary Policy Committee (MPC).
The central bank in a statement issued after the meeting said the decision reflected 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 statement read.
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Consistent with its mandate, the State Bank said, the MPC re-asserted its commitment to supporting households and businesses through the Covid-19 crisis and minimising damage to the economy.
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.
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“The MPC noted that the Covid-19 pandemic is spreading in many emerging markets, including Pakistan, and there are fears of a second wave in several other countries. It observed that risks to the global outlook are heavily skewed to the downside and the path of recovery remains uncertain.”
“In its update of the World Economic Outlook (WEO) released yesterday, the IMF downgraded its 2020 global growth forecast further to -4.9 percent, 1.9 percentage points lower than in April, and projected a more gradual recovery than previously anticipated.”
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Notwithstanding a seasonal uptick in food prices associated with the Eid holiday, the SBP stated that headline inflation declined further to 8.2 per cent in May on the back of the recent cut in diesel and petrol prices. In addition, month-on-month inflation rates continue to be low.
“The FY2020-21 budget is also expected to be neutral for inflation as the freeze on government salaries, absence of new taxes, and lower production cost from reduced import duties should offset the decline in subsidies in some sectors,” it said.
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