The State Bank of Pakistan (SBP) on Tuesday cut its key interest rate by 75 basis points to 12.50 per cent, the first reduction in four years, citing a declining inflationary pressure.

The central bank also announced measures to address the economic and health challenges posed by the spread of coronavirus in the country.

A dip in oil prices and a global slowdown caused by the pandemic should ease the country's inflationary pressure, which could also help improve the current account, the bank said.

“The outlook for inflation has improved in light of the recent deceleration in domestic food prices, significant decline in consumer price expectations, sharp fall in global oil prices, and slowdown in external and domestic demand due to the coronavirus pandemic,” the statement said.

Pakistan's consumer price inflation slowed to 12.40pc in February from the same month a year earlier and from 14.56pc in January, the highest in a decade.

Average headline inflation is expected to remain within the SBP's 11pc to 12pc forecast in fiscal year 2020, the statement said.

“Since this disease has spread, it has started impacting our economy,” said SBP Governor Reza Baqir.

The bank's earlier projection of 3.5pc growth this year is now likely to slide. “Now we think that it will be around 3pc,” he said.

The bank has held the 13.25pc interest rates steady since July when it took a pause from a series of hikes after data started showing the inflation rate stabilising. However, inflation has lately registered a decline.

The business community said it was expecting a higher cut.

The central bank in a press release noted that the COVID-19 pandemic has precipitated a slowdown in global demand and volatility in world financial markets, as well as a steep fall in oil prices.

It said the current market volatility being experienced in Pakistan is "externally driven" and the strengthening of the fundamentals of the country's economy that drove the improvement in Pakistani markets before the coronavirus outbreak "remains intact".

Predicting that volatility is likely to subside as global risk aversion reduces, the SBP said it "stands ready to take whatever additional actions that may be necessary to safeguard price and financial stability and support economic growth".

Refinancing facility for COVID-19

Among the measures announced by the central bank to cope with COVID-19 challenges is a “Temporary Economic Refinance Facility (TERF)” and its Shariah-compliant version to stimulate new investment in the manufacturing sector.

Under this scheme, the SBP said it will refinance banks to provide financing at a maximum end-user rate of 7pc for 10 years for setting up of new industrial units.

The total size of the scheme is Rs100 billion, with a maximum loan size per project of Rs5 billion.

The facility can be accessed by all manufacturing industries except the power sector, where a similar scheme already exists.

"This scheme will help counter any possible delays in the setting up of new projects that investors were planning prior to the coronavirus outbreak," the handout said. The facility will be available for a year only, requiring a letter of credit (LC) to be opened by the end of March 2021.

The SBP also unveiled a “Refinance Facility for Combating COVID–19 (RFCC)” and its Shariah-compliant version to support hospitals and medical centres in combating the spread of COVID–19.

Under this scheme, the bank will refinance banks to provide financing at a maximum end-user rate of 3pc for five years for the purchase of equipment to detect, contain and treat coronavirus. The SBP will provide this facility to banks at 0pc.

All hospitals and medical centres registered with federal or provincial health agencies and which are engaged in the control of COVID-19 will be eligible for the facility.

The total size of the scheme is Rs5 billion, with a maximum financing limit per hospital or medical centre of Rs200 million.

"This scheme will help contain the spread of coronavirus and reduce its human toll," the SBP said, adding that the facility is available until the end of September 2020.