AS per the market expectations, State Bank of Pakistan (SBP) cut the benchmark interest rate by 100 basis points to an eighteen month low of eight per cent to help people, businesses and the economy fight the Coronavirus pandemic.
The central bank has cumulatively cut the benchmark interest rate by a hefty 525 basis points, including the latest one, since the Coronavirus outbreak in the country in March indicating clearly it stands ready to take any measure to support the economy especially at these testing times. Interest rate is a tool available with the SBP to create balance between the rate of inflation and economic activities in the country. The expected further drop in inflation provided room to the central bank to cut the policy rate, which will reduce the cost of borrowing for households and businesses and will support economic growth and employment. This would also help businesses, including power, fertiliser, cement and steel manufacturers to easily continue paying interest money. The SBP itself admits that the successive policy rate cuts and sizeable cheap loans provided through the bank’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 which would otherwise have amplified the initial necessary contraction in activity. Nonetheless, when compared with other regional countries such as India and Bangladesh, our interest rate is still higher. In India, the interest rate has been reduced to 4.40% and Bangladesh 5.75%. The United States has gone to the extent of bringing it to almost zero to prop up the economy. The recent cut in policy rate by SBP is a step in the right direction to help the economy recover but that would not be enough. As the IMF and other financial institutions have predicted further slowdown in the economic growth of Pakistan due to the breakout of the contagion, we expect that the central bank takes further out of box steps and the foremost amongst them should be further slashed the interest rate and bring it to the level of other regional countries. To further reduce inflation, it is also important that the government passes on to the consumers the full benefit of international fall in the prices of petroleum products.
