Decision reflects improvement in inflation outlook
The State Bank of Pakistan reduced on Friday the policy rate by 100 basis points to 8%, it said in a statement.
The decision was made at a meeting of the central bank’s Monetary Policy Committee. It reflected the committee’s view that the inflation outlook has improved further in light of the recent cut in domestic fuel prices.
As a result, inflation could fall closer to the lower end of the previously announced ranges of 11-12% this fiscal year and 7-9% next fiscal year.
The committee highlighted that the coronavirus pandemic has created unique challenges for monetary policy due to its non-economic origin and the temporary disruption of economic activity required to combat it.
While easier monetary policy can neither affect the rate of infection transmission nor prevent the near-term fall in economic activity due to lockdowns, it can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption, it said.
The successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices, according to the MPC. This has contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity.
However, the inflation outlook is subject to two-sided risks.
“Inflation could fall further than expected if economic activity fails to pick up, as expected next fiscal year,” the central bank said. “On the other hand, there are some upside risks from potential food-price shocks associated with adverse agricultural conditions.”
Price pressures could also emerge if the economy gains greater momentum in the second half of FY21.
The MPC believed that with today’s rate cut, the monetary policy stance should support the economy over the coming months, while ensuring price and financial stability.