SBP adopts flexible monetary policy stance on adverse impact of COVID-19

SBP adopts flexible monetary policy stance on adverse impact of COVID-19

ISLAMABAD:  The adverse impact on the economy due to COVID-19 has forced the State Bank of Pakistan (SBP) to adopt flexible monetary policy stance, according to Pakistan Economic Survey 2019/2020 released on Thursday.

It said that the SBP adopted tight policy stance throughout FY2019 in order to contain the demand pressures and anchor inflation expectations.

The policy rate was increased by cumulative 575 basis points in six decisions taken during the last fiscal year.

At the start of current fiscal year, SBP raised the policy rate by 100 basis points to 13.25 percent in July 2019 keeping in view the high inflationary pressures from exchange rate depreciation and the expected increase in short-term inflation due to adjustments in utility prices and other measures announced in Budget 2019/2020.

The policy rate remained unchanged at 13.25 percent in subsequent monetary policy meetings held in September, November and January.

With the outbreak of COVID-19, which changed global and domestic economic landscape, SBP has changed its policy stance in March 2020 when Monetary Policy Committee (MPC) meeting held on March 17, 2020 decided to reduce policy rate from 13.25 to 12.50 percent.

The decision primarily based on the expectations of lower inflation in near future in the backdrop of deceleration in domestic food prices, sharp fall in global oil prices and sustained improvements in the current account.

The COVID-19 pandemic caused a slowdown in economic activity and increased uncertainty about the future.

So, in order to mitigate likely impact of Coronavirus on economy, MPC cut policy rate by 150 basis points to 11 percent during the same month.

The worsening outlook for global and domestic scenario convinced MPC to cut the policy rate in April 2020 by a further 200 bps to 9 percent.

However, SBP has further reduced the policy rate by 100 bps to 8 percent in light of improved inflation outlook in May 2020.

A cumulative cut in policy rate by 525 bps in two months is expected to provide cushion to growth and employment, and support for recovery as pandemic subsides, according to the survey.