In wake of the Coronavirus Disease (COVID-19) outbreak, the policy makers are on their toes to act on the emerging situation especially on the economic front. In a yet another bid to boost the dwindling economy, the Monetary Policy Committee (MPC) decide to reduce the prevailing policy rate by 200 basis points, bringing the policy rate to 9.0 percent.
The MPC in its last meeting on March 24, 2020, noted that it is ready to take whatever necessary actions in response to the evolving economic impact of the Coronavirus. The decision was made in an emergency meeting held on April 16, 2020. According to the statement issued by State Bank of Pakistan the decision to reduce policy rate further was based on the following reasons:
- The global and domestic 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 projections released this week by the IMF. 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.
- Global oil prices have plummeted further, with futures markets suggesting low prices will persist.
- Slowdown in most parts of the economy in recent weeks domestically such as retail sales, credit card spending, cement production, export orders, tax collections.
- On the inflation front, both the March CPI out-turn and more recent weekly SPI releases in April also show a marked reduction in inflation momentum. 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.
The statement further reads that 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. Furthermore, the MPC highlighted that this rate cut would complement other measures recently taken by the SBP to support the economy, including concessional financing to companies that do not lay off workers, one-year extension in principal payments, doubling of the period for rescheduling of loans from 90 to 180 days, and concessional financing for hospitals and medical centers incurring expenses to combat the Coronavirus pandemic.
It is worth mentioning that this is second in series of emergency meetings of the MPC since March 17, 2020 meeting. The MPC usually meets bi-monthly. Monetary Policy Committee is a ten members committee having participation from SBP Board, SBP Executives, external members which is responsible and fully empowered to decide the monetary policy stance under the SBP Act 1956.
