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MPC Preview: Can SBP deliver even more rate cuts?

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May 14, 2020 (MLN): Every known financial market event such as Monetary policy Committee meeting not only has an interest in Pakistan but also across the world, creating ripples before or after the event. State Bank of Pakistan is scheduled to announce monetary policy on Friday i.e. May 15, 2020, whereby market analysts expect a continuation of monetary easing, but the status quo cannot be ruled out, though.

The COVID -19 pandemic rendered the domestic economic outlook as SBP has projected the contraction in GDP growth by 1.5% in FY20. In the wake of this pandemic, since Mid-March, SBP cut rates three times in a row by a total of 425 basis points to 9%, following aggressive emergency rate cuts by its counterparts. The financial market is still expecting another rate cut in the upcoming policy for a few reasons.

The inflation readings i.e. NCPI is likely to continue its downward trajectory on an account of high base effects, lower food prices, and weak crude oil prices amid lockdown. As inflation doesn’t seem to be a threat now, which triggers another rate cut.  

Another factor to reduce policy rate is the yield behavior as treasury yields on short end dropped to as low as 7.3% by the end of April as low as 8.5% for the three-year bond which is lower than current policy rate of 9%, as per research note by EFG Hermes.

However, the increase in cut-off yield of 1-year T-Bill faded hopes of a further rate cut as its cut-off yield went up by 28 bps to 7.75% in recent T-Bills auction, revealed the research of Spectrum Securities.

Third, the recent change in macros given the outbreak of COVID-19 may further prompt SBP to incentivize the business by a further reduction in the policy rate. This downward expectation in policy rate would reduce the financial cost of already burdened leverage sectors like cement, steel, textile, and chemicals and that may not result in higher credit demand initially.

Fourth, during the last two months of FY20 Rupee-Dollar parity was moving in the range of PKR168-154.40/USD. The healthy expansion in FX reserves due to USD 1.4bnfrom IMF under RFI along with narrowing current account deficit are the major positive development supporting PKR against USD even after the evaporation of hot money which opens another gate for interest cut, Spectrum research added.

According to the research report by Foundation Securities, to combat and help the business survive the pandemic, SBP has already put in place a number of measures such as subsidized lending schemes, providing concessional financing to various sectors in the economy, rescheduling loans from 90 days to 180 days, causing the money supply to expand at an increasing rate. This increasing monetary expansion is expected to limit the downside to inflation in the coming months.

This time, again, market participants believe that SBP is likely to follow the suit as in a survey on the possible decision to be taken by the SBP’s Monetary Policy Committee following a global trend for rate cut to counter growth over Coronavirus outbreak, 10 out of 11 brokerage houses have projected a significant rate cut in upcoming monetary policy.

Monetary Policy Survey

Brokerage House


AL Habib Capital Markets

 -50 bps

Spectrum Securities 

-50 bps to -100 bps

EFG Hermes


Arif Habib Limited

-100 bps

Pearl Securities

-100 bps to -150 bps

Foundation Securities 

-100 bps

Taurus Securities 

-100 bps

Darson Securities


AKD Research 

 -50 bps

Aba Ali Habib

-100 bps

BMA Capital

-100 bps


Chairman of Optimus Capital Management, Mr. Asif Qureshi shared his views that the current policy rate of 9% is not sufficient to provide impetus to the economy in the testing times. He said there is a room in a current regime of monetary policy. He further said there is zero possibility that the government can provide further relief in terms of lowering taxes or increase development expenditures given that Pakistan is currently implementing IMF’s reforms program, the only possible relief can be expected from Central Bank in terms of lowering the interest rate by using monetary policy tool.

From the perspective of Former Secretary Finance, Dr. Waqar Masood, all around the globe, central banks have cut interest rates even to zero to stimulate the economy amid this pandemic. According to him, SBP should continue the reduction of the policy rate. He further said that the world economic paradigm has changed a lot amid COVID-19 as growing literature has broken the relationship between monetary policy and inflation targeting.  

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Posted on: 2020-05-14T15:08:00+05:00