Analysts eye minimum 0.5% reduction in SBP monetary policy rate
Buying your next car on lease and taking a personal or business loan is likely to be more affordable as a majority of experts polled by Samaa Money say they expect the central bank to cut the benchmark interest rate by at least 0.5% in the next monetary policy on Friday.
Revised every two months, the State Bank of Pakistan’s policy rate affects every interest rate in the market. If the SBP reduces this rate, commercial banks will also drop their interest rates, making borrowing cheaper for individuals, businesses and the government who borrow more and spend more, thus boosting economic activity and creating more jobs.
On April 16, the SBP had slashed the monetary policy rate by 2% to a single digit, its third rate cut since March 17 when this rate was at a nine-year high of 13.25%. The move was aimed at stimulating economic activity (job creation) after global financial institutions warned the world was heading towards a recession feared to be deeper than the 2009 financial crisis. The conservative growth forecast for Pakistan’s economy is -1.5% for the fiscal year ending June 2020.
The current rate is 9%, but the market is unanimous in its expectations about a further drop in the policy rate. All of more than half a dozen experts, including fund managers, securities analysts and economic experts, say the SBP will cut rates, but the forecast was evenly split between 50 to 100 basis points (0.1% equals 10 basis points). “All countries have slashed rates for stimulus and borrowing cost [is] still high for manufacturing and industry,” said Aaliya Dossa of Taurus Securities whose forecast was on the higher side of the split.
Besides slashing interest rates, the SBP has announced several other initiatives to kick start economic growth. Some of these include a one-year extension in payment of principal amounts and provision of subsidised or cheaper loans to businesses to prevent layoffs amid the ongoing economic slump.
The SBP’s priority is now tilted towards growth, it has stopped inflation targeting since March 17, economist Muzzammil Aslam said and others hold similar views. Among others eying a 1% cut, securities analyst Adnan Sami Sheikh says demand has contracted on the back of coronavirus pandemic, fuel prices have been cut and the demand for non-essential products will remain low. This will keep inflation in check.
Controlling inflation and ensuring economic stability are two of the SBP’s core functions. To achieve them, the central bank uses, among other tools, its policy rate, the interest rate at which commercial banks borrow money from the central bank. To boost economic growth central bank lowers interest rate, the opposite happens if it has to contain inflation. However, inflation has slowed in the last couple of months, creating more room for the central bank to reduce interest rates.
But not everyone in the market is convinced the central bank will go for aggressive rate cuts. “We expect the Monetary Policy Committee to act prudently by delivering a token rate cut of 50 basis points in the upcoming committee meeting,” AKD Securities said in a report. The brokerage house says inflation outlook is benign, just under 7%, for the next six months because of demand suppression and adjustments (deferred payments) in utility bills, but that is a temporary phenomenon. Inflation might surge again once life returns to normal and the government resumes its reform process under the IMF’s Extended Fund Facility programme, it said, adding aggressive easing at this stage may need to be reversed later. “SBP faces a dilemma, with a need to strike a balance between providing immediate relief to the economy and preserving macro stability over the medium term.”