Low crude oil prices offer opportunity to SBP to cut policy rate.

• Author: Kazmi, Shabbir
• Position: State Bank of Pakistan

Byline: Shabbir Kazmi

The pressure of trade and industry is mounting on State Bank of Pakistan (SBP) to curtail policy rate to bring down rate of inflation in the country. The basic premise is that country suffers from cost pushed inflation, which is also a key hurdle in boosting GDP growth rate and exports of the country. Some analysts are of the view that the current low international oil prices and expectations that these would hover below US$60/barrel in near future, offer an opportunity to SBP to seriously consider cutting policy rate. It has become all the more necessary as most of the central banks around the world are cutting down policy rate to avoid recession.

A series of attacks on tankers in or near the Strait of Hormuz and in the Red Sea, vessel seizures, and then the major strike on the key Saudi oil facility of Abqaiq failed to boost oil prices due to looming glut. Organization of the Petroleum Exporting Countries (OPEC) production was down 1.6 million barrels per day (bpd) in September from August, the lowest level since November 2003, but the price of Brent crude hovered below US$60/barrel. A pertinent question arises; will the price remain at this level even after the beginning of winter? The probability is yes and demands SBP to also convince International Monetary Fund (IMF) to allow it to cut policy rate.

The IMF October World Economic Outlook confirms the subdued outlook. The world economy is now forecast to grow at 3.0% in 2019, 0.3% lower than the IMF's earlier projection. There are few signs that the economic situation has hit rock bottom and is entering a recovery phase. Further downgrades are still possible.

The Fund noted that manufacturing activity has weakened substantially to levels not seen since the financial crisis of 2008, although the service sector remains relatively resilient. The OECD's Composite Leading Indicator continues to deteriorate, reaching 99.06 in August.

The Fund sees growth of 3.4% in 2020 and a slightly higher growth rate for 2021-24 but notes major downturns in many large developing market economies. It is their recovery in 2020 and beyond which underpins stronger growth and also stronger oil demand as growth in four key areas, representing half of global GDP - China, the euro area, Japan and the US - is expected to remain subdued.

Subdued demand

As a result of the weakening economic outlook, the US Energy Information Administration has cut its forecast for Brent to US$57/bbl in...