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Topline Flash Note: Pakistan Economy: Pak Central Bank further cuts Policy Rate to 7.0% from 8.0%

• The State Bank of Pakistan (SBP) in an emergent meeting, further reduced the Policy Rate to 7.0% from 8.0%. This takes cumulative easing to 625bps since Mar-2020.

Why further cut the policy rate?

• Inflation: The Central Bank believes the inflation outlook has improved further. The recently announced Budget is Neutral for inflation because of freeze on government salaries, absence of new taxes and lower production cost from reduced import duties. The Central Bank believes average inflation can fall below the previously announced range of 7-9% for the next fiscal year given absence of demand-side pressures.
• Demand: Worryingly, the Central Bank noted that downside risks to growth have increased. The statement highlighted the World Economic Outlook (WEO) that was released yesterday, where IMF downgraded its 2020 global growth forecast further to -4.9% and projected a more gradual recovery than previously anticipated.

Why now?

• There is approximately Rs3.3trn worth of loans due to be repriced by early July 2020, which is why SBP feels it is an ideal moment to take action from a monetary policy transmission perspective, as the reduction will immediately help reprice loans lower.

Outlook 

• SBP, once again, reiterated that the priority of monetary policy has appropriately shifted towards supporting growth and employment during these challenging times.

SBP outlook for the external sector remains stable. The Current Account balance should remain bounded.  The projected official and private inflows will keep the external position fully funded.