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.
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SBP slashes policy rate by 100 basis points to 8 percent
KARACHI: The State Bank of Pakistan (SBP) on Friday decided to further reduce the policy rate by 100 basis points to 8 percent as inflation outlook has improved further in light of the recent cut in domestic fuel prices.
A statement said that at its meeting on May 15, 2020, the Monetary Policy Committee (MPC) decided to reduce the policy rate by 100 basis points to 8 percent.
This decision reflected the MPC’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 percent this fiscal year and 7-9 percent next fiscal year.
The MPC 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.
In particular, 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.
This has contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity.
The MPC noted the swift and forceful monetary easing of 525 basis point in the two months since the beginning of the crisis and SBP’s measures to extend principal repayments, provide payroll financing, and other measures to support liquidity.
Together with the government’s proactive fiscal stimulus―including targeted support packages for low-income households, SMEs, and construction―as well as assistance from the international community, these actions should provide ample cushion to growth and employment, while also maintaining financial stability.
This coordinated and broad-based policy response has provided relief and stability and should provide support for recovery as the pandemic subsides.
In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.
Key developments since the last MPC meeting
The MPC noted three key developments since the last MPC meeting on 16th April, 2020. First, the government has significantly reduced petrol and diesel prices by 30-40 percent in response to the continued fall in global oil prices, which has improved the outlook for inflation.
Second, most countries, including Pakistan, have begun easing lockdowns, which should help provide support to economic activity.
Nevertheless, as elsewhere, the situation remains highly uncertain. A possible rise in infections could prompt fresh lockdowns, and the recovery could prove more sluggish than is currently being anticipated.
Third, due to timely policy actions and international assistance, the initial volatility observed in domestic financial and foreign exchange markets has somewhat subsided in recent weeks, although global financial conditions remain considerably tighter than before the coronavirus outbreak.
Recent supportive developments have helped to restore the SBP’s foreign reserves position to close to pre-coronavirus levels of over US$ 12 billion.
Economic data has been consistent with the expected sudden and sharp drop in activity. LSM witnessed a steep decline of 23 percent (y/y) in March, due to the withdrawal from economic and social activity aimed at slowing the spread of the virus. High-frequency indicators of demand such as credit card spending, cement dispatches, credit off-take and POL sales also suggest a marked contraction in domestic economic activity in both March and April. At the same time, after showing signs of recovery earlier in the year, both consumer and business sentiment have fallen sharply.
More recently, the government has initiated a phased lifting of restrictions for different economic sectors conditional on the future course of the pandemic. If this easing proceeds smoothly, activity should pick up in coming months. The MPC noted that, in light of preliminary evidence from China and other countries that eased lockdowns earlier than others, activity in service sectors and consumption, which form a large part of the domestic economy, could remain subdued for longer.
The current account deficit has continued to narrow, even though both exports and imports have fallen sharply since the coronavirus outbreak. Exports declined by 10.8 percent (y/y) in March. Imports, after indicating some recovery on in recent months, contracted by 19.3 percent (y/y). The April figures from the Pakistan Bureau of Statistics reveal an even steeper decline in both exports (54 percent) and imports (32 percent). While remittances have so far remained resilient, there are potential downside risks given the economic difficulties across the world, especially in oil exporting countries.
Despite challenging global conditions, the outlook for external sector broadly remains stable. The current account deficit should remain bounded and the recent fall in portfolio inflows will be offset by official flows committed by the international community, such that Pakistan’s external position remains fully funded. Together, these developments, buttressed by the flexible exchange rate regime, should continue to support a steady build up in the SBP’s foreign exchange reserve buffers.
Like the external sector, the fiscal sector was also on track of much-needed consolidation before the coronavirus outbreak. The primary balance recorded a surplus of 0.4 percent of GDP in Jul-Mar FY20 against a deficit of 1.2 percent in the same period of FY19, the first 9-month surplus since FY16. However, the substantial fall in economic activity since March has significantly affected tax revenues. After rising by 17.5 percent (y/y) during Jul-Feb FY20, tax revenues declined sharply by 15 percent (y/y) in both March and April. Moreover, given the needed increase in spending to support healthcare, businesses, households and more vulnerable segments of society, the fiscal deficit is expected to widen substantially in Q4.
The MPC noted the significant reduction in headline inflation since January on the back of sharply decelerating food and energy prices, as well as easing core inflation. Looking ahead, this waning price momentum is expected to be complemented by the recent 30-40 percent cut in domestic petrol and diesel prices, creating room for today’s additional rate cut. Today’s decision has brought the cumulative reduction in the policy rate to 525 basis points, which was enabled by the fact that both the fall in inflation in Pakistan since January and the expected further decline next year are the highest among comparable emerging markets.
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. 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.
Overall, the MPC felt that with today’s rate cut and based on available information, the monetary policy stance should support the economy over the coming months, while ensuring price and financial stability. In line with its previous communications, the MPC has remained data-driven and forward-looking in its interest rate decisions and stands ready to take appropriate actions as the need may arise.
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FPCCI demands 400 basis points cut in policy rate
KARACHI: The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Thursday demanded the central bank to cut the policy rate by 400 basis points to five percent.
The State Bank of Pakistan (SBP) is scheduled to release monetary policy statement on Friday May 15, 2020. The central bank in past two months reduced the policy rate by 4.25 percent to present 9 percent.
FPCCI President Mian Anjum Nisar in a statement said that the State Bank of Pakistan (SBP) should bring down the interest rate to 5 percent.
He said that the future anticipated expected inflation will further decline due to low demand and other effects of lockdown to control over spread of coronavirus.
On the other hand external front is also presently sustainable due to foreign financial support and rescheduling of debt that has supported reduction in current account deficit.
The FPCCI chief further stated that with both demand driven and import based inflation in check there is no reason to gradually bring down the interest rates when the case for immediate relief is apparent.
He said economy of Pakistan is already hit very hard as business activities remain stop while they are paying 12 percent banks markup and cannot survive on such high KIBOR rate.
There is 4-5 percent interest rate in Pakistan immediate regional competitors China, India Bangladesh.
The SBP should also advice banks to revise KIBOR on a monthly basis instead of quarterly to pass on the benefit of lower rates faster to companies struggling to survive.
The impact to banks on their deposits will be insignificant as majority is demand deposits instead of time deposits.
Therefore, SBP lower interest rate to 5 percent in one go that is immediately reduction of 400 basis points rather lower in stages.
He said that tough situations under COVID-19 demand support while conditions rationally suggest lowing of policy rate directly to 5 percent.
While appreciating SBP role in sustaining economic growth through supporting trade and industry, Anjum Nisar emphasized upon financial relief by reduction in the interest rate.
He said State bank should take measures and develop strategy to protect the pace of economic and trade progress of Pakistan Other- wise we will again face economic crises, lower industrial growth and shifting of industrial units in sick industry.
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SBP likely to further ease monetary policy stance by 100bps: analysts
KARACHI: Analysts believe that the State Bank of Pakistan (SBP) likely to further ease the key policy rate by 100 basis points in the upcoming announcement scheduled for May 15, 2020.
Analysts Arif Habib Limited said that the monetary policy committee of SBP will convene on Friday (15th May 2020) to announce the monetary policy for the next two months.
“We expect the SBP to cut policy rates by 100 bps to 8.00 percent in the upcoming monetary policy statement,” the analysts said.
The said that the SBP may reduce the policy rate due to the following reasons:
i) Inflation is likely to continue its downward trend due to massive decline in prices of petroleum products (MoGas and HSD prices reduced by Rs15/liter and Rs27/liter) along with lower demand of perishable items which may reduce inflationary pressure; and
ii) Recent change in macros given outbreak of the Novel Coronavirus which may further induce the SBP to stimulate the economy by reducing policy rate further.
Moreover, it seems the fixed income market has already incorporated rate cut as treasury bills of 3-, 6- and 12-month are trading at 8.39 percent, 8.00 percent and 7.75 percent which are lower than current policy rate of 9.00 percent.
To recall, Monetary Policy Committee (MPC) convened emergency meeting on April 16, 2020 where the SBP announced a further cut in the policy rate by 200 basis points which is in addition to the 225 basis points cut announced in March, taking the policy rate to a single-digit of 9 percent.
The MPC opted rate cut stance on account of i) to cushion the economic fallout (slowdown in growth and employment) amid Coronavirus, ii) worsening outlook for global and domestic economic activity in the wake of the Coronavirus Pandemic, and iii) SBP forecasting inflation to come down to single digits between 7-9 percent in the next fiscal year.
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SBP to announce monetary policy on May 15
KARACHI: State Bank of Pakistan (SBP) on Monday said that it will announce monetary policy statement for next two months on Friday May 15, 2020.
The SBP in previous three announcement during past two months reduced the policy rate by 4.25 percent to 9 percent from 13.25 percent.
In the last monetary policy meeting on April 16, 2020 decided to cut the policy rate by a further 200 basis points to 9 percent.
The SBP said that at its last meeting on 24th March 2020, the Monetary Policy Committee (MPC) noted the worsening outlook for global and domestic economic activity in the wake of the Corona pandemic. Given the unfolding situation, the MPC noted that it “remains ready to take whatever further actions become necessary in response to the evolving economic impact of the Coronavirus.”
Since the last MPC meeting, the global and domestic outlook has further deteriorated. The world economy is expected to enter into the sharpest downturn since the Great Depression, contracting by as much as 3 percent in 2020, according to projections released this week by the IMF.
This is a much deeper recession than the 0.07 percent contraction during the global financial crisis in 2009. Moreover, there are severe risks of a worse outcome. In addition, global oil prices have plummeted further, with futures markets suggesting low prices will persist.
Domestically, high-frequency indicators of activity―including retail sales, credit card spending, cement production, export orders, tax collections, and mobility data from Google’s recently introduced Community Mobility Reports―suggest a significant slowdown in most parts of the economy in recent weeks. On the inflation front, both the March CPI out-turn and more recent weekly SPI releases in April also show a marked reduction in inflation momentum.
While there is exceptionally high uncertainty about the severity and duration of the Coronavirus shock, the developments discussed above imply further downward revision in the outlook for growth and inflation.
The economy is expected to contract by -1.5 percent in FY20 before recovering to around 2 percent growth in FY21. Inflation is expected to be close to the lower end of the previously announced 11-12 percent range this fiscal year, and to fall to 7-9 percent range next fiscal year.
While there are some upside risks to headline inflation in case of temporary supply disruptions or food price shocks, these are unlikely to generate strong second-round effects due to the weakness of the economy.
Similarly, the inflationary impact of the recent exchange rate depreciation is expected to be contained given low import demand and falling global prices.
This reduces forward looking real interest rates (defined as the policy rate less expected inflation) to around zero, which is about the middle of the range across most emerging markets.
The MPC was of the view that this action would cushion the impact of the Coronavirus shock on growth and employment, including by easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability. It would also help ensure that economic activity is better placed to recover when the pandemic subsides.
The MPC highlighted that this rate cut would complement other measures recently taken by the SBP to support the economy, including concessional financing to companies that do not lay off workers, one-year extension in principal payments, doubling of the period for rescheduling of loans from 90 to 180 days, and concessional financing for hospitals and medical centers incurring expenses to combat the Coronavirus pandemic.
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SBP cuts policy rate by 75bps below expectations: analysts
KARACHI: Analysts have said that the policy rate cut by 75 basis points by the State Bank of Pakistan (SBP) is below the street expectations.
The central bank in its Monetary Policy Statement (MPS) has cut Policy Rate by 0.75 percent to 12.5 percent – lower-than-our expectations of 1.0 percent, analysts at Topline Securities said.
While the latest move by SBP follows aggressive emergency rate cuts by its global counterparts to combat coronavirus pandemic that has jolted financial markets and the world economy, it falls short of street expectations.
In a survey conducted by Topline Research before the spread of the coronavirus, 80 percent of the fund managers were expecting 50-100bps cut in Policy Rate. That said, a similar poll conducted yesterday revealed that 80 percent of the fund managers have revised their expectations to a 100-200bps cut in Policy Rate.While acknowledging that medium term inflation target of 5-7 percent is likely to be achieved earlier-than-expected due to steep fall in international oil prices and deceleration in domestic food prices, the SBP opted to conservatively cut the Policy Rate by just 0.75 percent – even though the Pak economy is also likely to face significant impact of coronavirus outbreak.
The analysts estimated that an average 0.5 percent MoM rise in CPI over the next five months would result in CPI inflation clocking in at 8.9 percent YoY in Jul-2020 (sensitivity on next slide), which will translate in a Real Interest Rate of 3.6 percent.
Analysts at Arif Habib Limited said that in response to the rapid contagion of the novel coronavirus world over, with confirmed cases exceeding 183,000 as off latest tally, majority of the effected countries have ordered closure of schools, prohibited large gatherings with a few cities under quarantine and pressed citizens to avoid unnecessary travelling. In addition to this, the Pakistani government advised the public against hoarding of essential food items.
Whereas the prime minister has directed senior government officials to not only carry all preventative measures to mitigate the outbreak of the virus, but also remain in close contact with various international agencies so as to secure monetary assistance to combat the emergency.
With major decline in food inflation previously emanating from temporary supply side shocks, and an abrupt crash in International oil prices amid disintegration of the OPEC-Plus alliance (Arab Light down by 37 percent since Russia’s resistance to deepen cuts and an ensuing price war led by Saudi Arabia), a cut in the benchmark policy rate remained imminent.
Moreover, given the announcement of monetary and fiscal relief by major global economies to contain the potential economic fallout post spread of corona, Pakistan’s case for a rate cut appeared stronger than before given rising interest rate differential. More so since the incumbent government had limited fiscal space.
Accordingly, the State Bank of Pakistan has decided to cut the key policy rate by 75bps in its latest Monetary Policy Statement (MPS).
Analysts at Taurus Research said that outlook for inflation has improved in the light of declining food prices, the significant decrease in international oil prices and slowdown in aggregate demand owing to the coronavirus pandemic.
SBP projects real GDP growth for Pakistan to be around 3 percent for FY20. FY20 inflation target of 11 percent-12 percent.
The MPC noted that under an adverse scenario of economic slowdown, declining exports, lower remittances and dampened sentiment among consumers and businesses, there could be a material negative impact on growth.
Further, the increase in net reserve buffers of the SBP of around USD 10.7Bn (on account of build-up in SBPs reserves and reduction in forward liabilities), was flagged as sufficient to cope with outflows of any foreign portfolio investments.
The MPC also noted that with the reduced policy rate, real interest rates are appropriate to achieve the medium-term inflation target of 5 percent-7 percent.
With the reduction, the analysts anticipate the banking sector spread to peak during 2QCY20, on account of immediate re-pricing of deposits.
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SBP to announce monetary policy on March 17
KARACHI: State Bank of Pakistan (SBP) will announce monetary policy statement for next two months on March 17, 2020, a statement said on Monday.
The monetary policy committee (MPC) will review the existing policy rate along with economic indicators and inflation.
The SBP kept the policy rate at 13.25 percent during the three policy statement.
The SBP kept the policy rate unchanged at 13.25 percent since July 2019 on the back of uptick in prices of consumer items.
Market analysts anticipate 100 basis points cut in policy rate due to sharp decline in world oil prices and improvement in economic indicators.
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SBP keeps policy rate unchanged at 13.25%
KARACHI: The State Bank of Pakistan (SBP) announced on Tuesday that it has decided to maintain the policy rate at 13.25%. SBP Governor Dr. Raza Baqir conveyed this decision, which was made during the Monetary Policy Committee (MPC) meeting. The SBP emphasized that the outlook for inflation remains steady, prompting the committee to retain the current monetary policy stance.
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Policy rate likely unchanged on high inflation
KARACHI: The State Bank of Pakistan (SBP) is likely to keep the policy rate unchanged due to the recent surge in inflation, analysts said on Thursday.
Analysts at Arif Habib Limited expect inflation to remain elevated in upcoming months on account of regular adjustment in electricity price (fuel cost adjustment and base tariff hike), another round of gas price increase, increase in prices of petroleum products, and continuous surge in prices of perishable and non-perishable food items.
On the monetary policy front, they maintain a status quo stance on the upcoming Monetary Policy Statement (MPS) scheduled on 28th Jan’20, with no change expected in interest rate (policy rate to be maintained at 13.25%) as they believe the surge in inflation is due to supply disruptions of key commodities and this might settle down in coming months. We expect inflation to start declining from March 2020 to 11.5% due to the high base effect. After considering forecasted inflation, we expect rate cuts to begin from March 2020.
They expect January 2020 inflation to settle at 13.58% YoY compared to 5.6% in Jan’19 and 12.63% in December 19, respectively.
The YoY uptick in CPI is expected on the back of i) increase in prices of non-perishable products including Pulse Moong, Chicken, Pulse Gram, Eggs, Gur and Wheat Flour, ii) increase expected in quarterly house rent index by 1.5%, and iii) increase in prices of petroleum products.
Whereas a decline in prices of perishable items is expected to keep the inflation restrained. This will take the 7MFY20 average inflation to 11.46% compared to 5.9% in 7MFY19. On a yearly basis, an increase in inflation will likely be led by Food (+21% YoY), Transport (+15.4%YoY), Alcoholic Beverages & Tobacco (+14.6% YoY), and House Hold Equipment (+12.9%).
On a MoM basis, CPI reading is expected to increase by 1.20% attributable to surge in House Hold Equipment index (+2.4% MoM), Housing Index (+1.7% MoM), Food index (+1.4% MoM) and Transport Index (+1.4% MoM).
As per three weeks Sensitive Price Index (SPI) data published by the Pakistan Bureau of Statistics (PBS), average prices of Pulse Moong, Chicken, Pulse Gram, Eggs, Gur and Wheat Flour are expected to register a jump of 15%, 13%, 13%, 11%, 8% and 5% MoM, respectively.
On the other hand, meagre decline in prices of essential food items like Onions (-15% MoM), and Tomatoes (-5% MoM) are expected to keep the food index contained.
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SBP to announce monetary policy on January 28
The State Bank of Pakistan (SBP) is set to unveil its monetary policy for the upcoming two months on Tuesday, January 28, 2020, as confirmed by a statement released on Tuesday.
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