Pakistan cuts interest rate by 100 bps to support businesses against COVID-19 impact

According to the statement from the SBP on Friday, the Monetary Policy Committee of the central bank slashed the rate, hoping that "the inflation outlook has improved further in light of the recent cut in domestic fuel prices" which can also lead inflation to 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 central bank highlighted that the pandemic has created unique challenges for a monetary policy due to its non-economic origin and the temporary disruption of economic activity required to combat it.

The SBP viewed that the fresh-cut in the rate can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption.

"The successive policy rate cuts and sizeable cheap loans enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices," added the statement.

Following the lockdown caused by the COVID-19 spread, the SBP has revised monetary policy by four times slashing the policy rate by 525 basis points bringing it down to 8 percent which was 13.25 percent before March 17.

The bank believed that the country's proactive fiscal stimulus, including targeted support packages for low-income households, small and medium-sized enterprises, and the construction sector, as well as assistance from the international community, would provide ample cushion to growth and employment, while also maintaining financial stability.

The central bank said easing the lockdown would provide stimulus to economic activities, fearing that a possible sharp rise in infections could prompt fresh lockdowns, and the recovery could prove more sluggish than currently anticipated.