Monetary policy: SBP cuts interest rate by 75bps to 12.5%

KARACHI: Akin to the move adopted by world economies to slash interest rates to shore up the economy, the State Bank of Pakistan (SBP) cut the interest rate by 75 basis points to 12.5% for the next two months.

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The announcement was largely in line with market expectations as analyst had expected a rate cut due to low inflation outlook in the domestic economy and to tackle the potential impact of the coronavirus pandemic on the country.

A massive over 30% drop in international crude oil prices primarily due to the virus concerns created a big room for the policy rate reduction.

Pakistan’s economy heavily relies on imported energy resources. The share of energy in the total import bill stood at one-fourth in first seven months of FY20. The drop in global oil prices is estimated to help Pakistan save around $5 billion in the annual import bill.

Over the past few weeks, a large number of world economies have cut interest rates to allay investor concerns as global markets remain in free fall.

The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the inter-bank market. It is one of the tools the central bank uses to ensure price stability in the economy.

Earlier, Prime Minister Imran Khan had also expressed hope that the central bank would cut the benchmark interest rate, which is needed to step up economic activities.

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