Monetary policy: SBP slashes interest rate by 100bps to 7%

Decision comes on back of improved inflation outlook, downside risks to growth

KARACHI: In a surprising move on Thursday, the State Bank of Pakistan (SBP) slashed the interest rate by 100 basis points to 7%.

“At its meeting held on June 25, 2020, the Monetary Policy Committee (MPC) decided to reduce the policy rate by 100 basis points to 7%,” read a statement issued by the central bank.

“This decision reflects MPC’s view that 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 central bank pointed out.

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.

The central bank observed that risks to the global outlook are heavily skewed to the downside and the path of recovery remains uncertain.

The MPC also noted that in its update of the World Economic Outlook (WEO) released on Wednesday, the IMF downgraded its 2020 global growth forecast further to negative 4.9%, 1.9 percentage points lower than in April, and projected a more gradual recovery than previously anticipated.

Consistent with its mandate, the MPC reasserted its commitment to supporting households and businesses through the Covid-19 crisis and minimising damage to the economy.

In this regard, the central bank 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 Rs3.3 trillion worth of loans due to be repriced by early July 2020, which is 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.