KARACHI: The State Bank of Pakistan has slashed the interest rate by 100 basis points to 7 per cent in an effort to push up growth which is still sliding downward despite pumping of a huge liquidity into the economy.

The decision announced by the central bank on Thursday was expected by both the financial and business circles.

The bank said inflation was on the decline. The falling inflation trend is helping the policymakers to cut the interest rate.

This is the fifth rate cut since the coronavirus began to spread in the country in March. Since then the SBP has slashed the policy rate by 625 basis points from a rate of 13.25pc. But the businesses still demand a rate cut in the range of 3 to 4pc to accelerate the economic activities drastically damaged by the Covid-19 pandemic.

The coronavirus which emerged in March has crippled entire segments of the economy, except agriculture.

The Monetary Policy Committee (MPC) observed that the flexible exchange rate has played the role of a valuable shock absorber, helping cushion the country’s economy from the tightening of financial conditions associated with capital outflows from emerging markets and deteriorating global sentiment.

It noted that the depreciation of the rupee has been lower than in many other emerging markets, reflecting the increased reserve buffers accumulated over the last year.

The outlook for the external sector remains stable.

Recent data confirm the view that the current account deficit should remain bound through the Covid-19 crisis due to lower oil prices.

In addition, projected official and private inflows are expected to keep the external position fully funded.

The MPC said a strong and data-driven monetary policy response should support gro­wth and employment, while keeping inflation expectations anchored and maintaining financial stability.

Inflation has come down considerably from a high of 14.56pc, year on year, in January to 8.22pc in May, adds Reuters.

The government is targeting average inflation to be 6.5pc in the financial year 2020-21.

Against the backdrop of receding demand-side inflation risks, the priority has shifted toward supporting growth and employment during these challenging times, the SBP said.

The MPC noted that the path to recovery was uncertain, referring to the IMF slashing its global growth outlook to -4.9pc, 1.9 percentage points lower than in April.

The central bank said its move to slash the rate is based on the re-pricing of loans worth Rs3.3 trillion ($19.80 billion) being due in early July.

“In this way, the benefits of interest rate reductions would be passed on in a timely manner to households and businesses.”

Published in Dawn, June 26th, 2020