SBP REDUCES POLICY RATE: TOO LITTLE TOO LATE.

Byline: SHABBIR H. KAZMI

A t its meeting on 17th March 2020, the State Bank of Pakistan's Monetary Policy Committee (MPC) decided to cut the policy rate by 75 bps to 12.50 percent. The decision reflected the MPC's view that the outlook for inflation has improved in light of the recent deceleration in domestic food prices, significant decline in consumer price expectations, sharp fall in global oil prices, and slowdown in external and domestic demand due to the coronavirus spread. The Committee emphasized that it stood ready to take further actions if and when needed as more information becomes available on the outlook for inflation and growth. In reaching this decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

KEY DEVELOPMENTS

It was noted that the dominant development since the last meeting on 28th January 2020 has been the outbreak of the coronavirus, which has reduced external and domestic demand, while increasing risk aversion and uncertainty about the future. At the same time global oil prices have plummeted which, if sustained, should help lower domestic inflation and improve the current account. Heightened global risk aversion has recently reduced demand for emerging market assets across the world, and has led to some volatility and depreciation in the domestic foreign exchange market in the past few days, as in other emerging markets.

The MPC emphasized that the current market volatility is externally driven and the strengthening in the fundamentals of Pakistan's economy that drove the improvement in Pakistan markets before the coronavirus outbreak remains intact. As a result, they viewed that the volatility in the domestic markets would likely subside once global risk aversion reduces and country-spe cific fundamentals regain importance.

REAL SECTOR

Recent high-frequency indicators reaffirmed that the decline in most economic sectors was bottoming out before the coronavirus outbreak. Large-scale manufacturing (LSM) rebounded strongly in December 2019, moving into positive growth, for the first time in the last six months, and indicated strengthening in a growing number of industries, especially export-oriented ones. Notwithstanding some improvement relative to last year, agricultural growth is likely to be lower than previously forecast. In light of recent domestic and global developments, SBP now projects real GDP growth...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT