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Topline Flash Note: Pakistan Economy: Pakistan Central Bank lowers Policy Rate by another 100bps to 8.0%

• Pak Central Bank has lowered Policy Rate by another 100bps to 8.0% - largely in line with the market expectations.
• This is the fourth reduction in Policy Rate by the Pak Central Bank since Mar 17, 2020, taking cumulative easing to 5.25% from 13.25% to address the worsening outlook of domestic economic activity in the wake of Covid-19 pandemic. The SBP governor said that they are cautiously optimistic and they want to ease the pain for the businesses by reducing the interest rates.
• The State Bank of Pakistan (SBP) has highlighted three key developments since the last Monetary Policy meeting. (1) The petrol and diesel prices have been cut by 30-40%, (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.
• The 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 FY20.
• The 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, the SBP governor believes inflation is not a concern and focus of the Central Bank remains more on financial stability.
• SBP, once again in its policy statement, stated that monetary policy stance should support the economy over the coming months, while ensuring price and financial stability. SBP is ready to act further based on new data coming in the future.
• The SBP governor also highlighted that Pakistan remains in talks with the IMF over the EFF program, and one can expect a staff level agreement soon.
• On the banking sector, SBP director said that they do not see a liquidity stress so far. Moreover, deposit withdrawals due to prevailing uncertainty is also not abnormal.
• From equity market’s vantage point, we believe the SBP’s decision will benefit the highly leverage sectors like Cements, Steel etc.