State Bank of Pakistan (SBP) has lowered Policy Rate by another 100bps to 8.0%, which is being termed below market expectations.
This is the fourth reduction in Policy Rate by the Pak Central Bank since 17th March 2020, taking cumulative easing to 5.25% to address the worsening outlook of domestic economic activity in the wake of coronavirus pandemic. The Monetary Policy Committee (MPC) has termed the move cautiously optimistic and expressed commitment to ease the pain for the businesses by reducing the interest rates, if required.
State Bank of Pakistan (SBP) has highlighted three key developments since the last Monetary Policy meeting: 1) petrol and diesel prices have been cut by 30-40 percent, 2) most countries, including Pakistan, have begun easing lockdowns and 3) initial volatility observed in domestic financial and foreign exchange markets has somewhat subsided in recent weeks.
Inflation outlook has improved further because of recent cut in domestic fuel prices. SBP expects inflation to fall closer to the lower end of both the previously announced ranges of 11-12% for FY20 and 7-9% for FY21.
SBP highlighted that failure of economic activity to pick up as a key downside risk to inflation, while potential food price shocks pose some upside risks. However, MPC believes inflation is not a concern and focus of the central bank remains on financial stability.
MPC has once again stated that monetary policy stance should support the economy over the coming months, while ensuring price and financial stability. It also expressed willingness to act further based on new data coming in the future.
MPC also highlighted that Pakistan is in constant touch with IMF over EFF program, and expect a staff level agreement soon.
SBP does not see a liquidity stress so far. Moreover, deposit withdrawals from commercial banks are not abnormal, keeping in view the prevailing uncertainty.
From equity market’s vantage point, analysts believe the SBP decision will benefit the highly leverage sectors like Cements, Steel etc.