Zubair Yaqoob
Karachi
In line with market expectations, Pakistan’s central bank has cut the benchmark interest rate by 100 basis points to 8% to help people, businesses and the economy fight against the coronavirus pandemic.
The State Bank of Pakistan announced the decision taken by its monetary policy committee in a meeting on Friday. A further drop expected in the rate of inflation provided a room to the central bank to having cut the 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 the lower end of the previously announced ranges of 11-12% this fiscal year and 7-9% next fiscal year,” a statement issued by the bank stated.
The interest rate is a tool available with SBP to create a balance between the rate of inflation and economic activities in the country.
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.
