The Monetary Policy Committee (MPC) of SBP decided to reduce the policy rate by 100 basis points during its meeting held today 15th May 2020. The new policy rate will be at 8 percent which was 9 percent earlier.
This decision is primarily based on the improved inflation outlook in light of the recent cut in domestic fuel prices. The inflation is expected to 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.
Earlier, the MPC had cut the policy rate by 200 basis points to 9 percent. On an aggregate basis, the policy rate has been reduced by 525 basis point during last two months after the outbreak of COVID-19 pandemic.
This decision to reduce SBP policy rate would help to provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption.
The press release issued by SBP stated that the global and domestic economic outlook has further deteriorated. The world economy is expected to enter into the sharpest downturn since the Great Depression, contracting by as much as 3 percent in 2020, according to IMF’s projections. This is a much deeper recession than the 0.07 percent contraction during the global financial crisis in 2009. Moreover, there are severe risks of a worse outcome. In addition, global oil prices have plummeted further, with futures markets suggesting low prices will persist.
Domestically, high-frequency indicators of activity-including retail sales, credit card spending, cement production, export orders, tax collections suggest a significant slowdown in most parts of the economy in recent weeks. On the inflation front, March CPI out-turn and more recent weekly SPI releases in April also show a marked reduction in inflation momentum.
While there is exceptionally high uncertainty about the severity and duration of the Coronavirus shock, the developments discussed above imply further downward revision in the outlook for growth and inflation. The economy is expected to contract by -1.5 percent in FY20 before recovering to around 2 percent growth in FY21.
Inflation is expected to be close to the lower end of the previously announced 11-12 percent range this fiscal year, and to fall to 7-9 percent range next fiscal year. While there are some upside risks to headline inflation in case of temporary supply disruptions or food price shocks, these are unlikely to generate strong second-round effects due to the weakness of the economy. Similarly, the inflationary impact of the recent exchange rate depreciation is expected to be contained given low import demand and falling global prices.
