SBP reduces interest rate by 100 basis points to 8 percent

ISLAMABAD (92 News) – The State Bank of Pakistan (SBP) has further reduced the interest rate by 100 basis points to eight percent. It was decided during a meeting of the monetary policy committee (MPC) on Friday. “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 the lower end of the previously announced ranges of 11-12 percent this fiscal year and 7-9 percent next fiscal year,” said a press release issued by SBP. The MPC 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. While easier monetary policy can neither affect the rate of infection transmission nor prevent the near-term fall in economic activity due to lockdowns, it can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption. In particular, the successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices. This has contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity. The committee noted the swift and forceful monetary easing of 525 basis points in the two months since the beginning of the crisis and SBP’s measures to extend principal repayments, provide payroll financing, and other measures to support liquidity. Together with the government’s proactivefiscal stimulus―including targeted support packages for low-income households, SMEs, and construction – as well as assistance from the international community, these actions should provide ample cushion to growth and employment, while also maintaining financial stability. This coordinated and broad-based policy response has provided relief and stability and should provide support for recovery as the pandemic subsides.