4th time cut in policy rate @8%

For the 4th time in a row the State Bank of Pakistan (SBP) on Friday announced another cut of 100 basis points (bps) in the Policy Rate by fixing it at 8%, a press release said.

The SBP has reduced the policy rate by a cumulative 525 bps since 17 March 2020.

According to the central bank, the Monetary Policy Committee (MPC) at its meeting on 15th May 2020 made the latest adjustment in the Policy Rate. This decision reflected the MPC’s view that the inflation outlook has
improved further in light of the recent cut in domestic fuel prices.

As a result, inflation could fall closer to its lower end of the previously announced ranges of 11-12 per cent this fiscal year and 7-9 per cent next fiscal year, the press release added.

It was a long-standing demand of the traders to reduce the interest rate to facilitate their borrowings from banks. The traders have been demanding to reduce the Policy Rate to 2-3 per cent.

To facilitate the businessmen from the economic shocks of the Coronavirus (COVID-19) related lockdown in Pakistan the central bank has already announced a special scheme to provide soft loans to the private sector so that they can retain and pay salaries to their employees during the lockdown closure of the offices. On April 10, 2020, the SBP announced an incentive scheme entitled Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns.

The SBP enhanced its refinance limits to finance up to 100% of wages and salaries of businesses with an average 3- month wage bill of up to Rs 500 million. This can be used for the onward payment of wages and salaries in April, May and June 2020. Earlier, 100% financing was available up to a wage bill of Rs 200 million only. Similarly, for businesses with a 3-month wage bill exceeding Rs 500 million, State Bank will now finance of up to 75% with maximum financing of Rs 1 billion. Earlier, 75% financing was available up to a maximum of Rs 375 million and 50% up to a maximum of Rs 500 million.

The profits on bank deposits, term deposits and fixed deposit schemes would further be reduced as the commercial banks including National Saving Centre have already reduced their rates to a minimal level and pensioners and widows who have been investing in various schemes to earn regular income would receive less amount. Currently, term deposit profits range from 7 to 7.5 percent when the discount rate was 9 per cent. These banks will certainly reduce it further to bring to the level of 6 yo 6.5 percent.

Lockdown Diary: State Bank further cuts discount rate by 2% @9%

In a sudden and surprising move, the central bank announced today to further reduce the policy rate by 200 basis points (bps) to fix it in a single digit @ 9 per cent. The Monetary Policy Committee (MPC) of the State Bank of Pakistan in an emergency meeting on Thursday announced the cut in the policy rate, which is the third in a row during a period of less than a month.

Pakistan Central Bank has recorded a 4.25% reduction, which is the world’s highest rate cut in response to the coronavirus pandemic (COVID-19), said Muzammil Islam, a senior economist in his Facebook post.

“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 Monetary Policy Statement issued by SBP Thursday stated.

The MPC was of the view that this action would cushion the impact of the Coronavirus shock on growth and employment, including 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 noted the worsening outlook for global and domestic economic activity in the wake of the Corona pandemic. Given the unfolding situation, the MPC noted that it “remains ready to take whatever further actions become necessary in response to the evolving economic impact of the Coronavirus,” the statement said.

The world economy is expected to enter into the sharpest downturn since the Great Depression, contracting by as much as 3 per cent in 2020, according to projections released this week by the IMF. This is a much deeper recession than the 0.07 per cent contraction during the global financial crisis in 2009. Moreover, there are severe risks of a worse outcome, the statement said.

Despite the fact it was a longstanding demand of the traders to reduce the interest rate, this cut would affect the savings, as the profits on bank saving and terms deposits would be slashed down in the same proportion.

The traders have welcomed today’s decision of SBP.

Last time, the central bank had announced a cut in the policy rate on March 17 after a long four-year’s period by slashing 75 bps to 12.50% citing a declining inflationary pressure and a need to sustain the economy that was hit by the coronavirus crisis. This reduction was termed a meagre by the businessmen who rejected it.

Due to mounting pressure, within one week later on March 24^th the SBP again reduced the rates by 150 basis points to 11 per cent stating that the COVID-19 pandemic had caused major disruptions to economic activity and the IMF had also significantly downgraded its global growth outlook for 2020 from 3.3% growth previously to below zero.

The banks were paying over 12.5 per cent per annual interest rate on one year or more fixed/term deposits before March 17, which was reduced to 10 per cent per annum when the policy rate was reduced to 11 per cent on 24th March.