The State Bank of Pakistan (SBP) has cut the policy rate by 200bps to 9.0% in an unscheduled meeting. This is the third rate cut in the past 30 days, taking the cumulative monetary easing in 2020 to 425bps. This leaves the real interest rate near zero, based on the SBP’s revised projected FY21 inflation of 7-9%.

The reasons for today’s cut include:

The SBP is factoring in sharp global contraction, expected to be the worst since the Great Depression (the IMF expects global GDP to decline by 3% in 2020). For Pakistan, the SBP has now adopted the same estimates as that of IMF; Pakistan’s GDP is projected to contract by 1.5% in FY20 (first recession since 2009) and grow by 2.0% in FY21 (earlier IMF projections were 2.4% and 3.0% respectively). As per the SBP, this cut will help cushion the economic fallout from the outbreak and also help jumpstart economic activity once the pandemic subsides.

Significant disinflation is expected. Future CPI readings could seep into the single digits (potentially from April onwards, from 10.2% in March), in our view, based on sharp decline in oil prices, moderation of food inflation, and further decline in other global commodity prices. Inflation is expected to fall to 7-9% range during FY21. The 20yr average inflation in Pakistan is c.8%.

In our view, the SBP may also have drawn comfort from the committed external flows: (i) from IMF (new RFI program of US$1.4bn), (ii) deferment of bilateral loan payments by a year by the G20 countries, and (iii) assistance from other multilateral agencies. These together could help in containing the negative impact on the exchange rate from the sharp cuts in interest rates (the PKR slipped 8% in March but has been stable so far in April). (Intermarket Securities Limited)