Pakistan cuts key rate to 12.50% amid fear of growth slide due to coronavirus

KARACHI (Reuters) - Pakistan’s central bank on Tuesday cut its key interest rate by 75 bps to 12.50%, the first reduction in four years, citing a global slowdown to ease inflationary pressure.

A brass plaque of the State Bank of Pakistan is seen outside of its wall in Karachi, Pakistan December 5, 2018. REUTERS/Akhtar Soomro/Files

A dip in oil prices and a global slowdown caused by the coronavirus should ease Pakistan’s inflationary pressure, which could also help improve the current account, the bank said.

“The outlook for inflation has improved in light of the recent deceleration in domestic food prices, significant decline in consumer price expectations, sharp fall in global oil prices, and slowdown in external and domestic demand due to the coronavirus pandemic,” the statement said.

Pakistan’s consumer price inflation slowed to 12.40% in February from the same month a year earlier and from 14.56% in January, the highest in a decade.

Average headline inflation is expected to remain within the state bank’s 11% to 12% forecast in fiscal year 2020, the statement said.

“Since this disease has spread, it has started impacting our economy,” said the bank’s governor Reza Baqir.

Pakistan’s earlier projection of 3.5% growth this year was now likely to slide. “Now we think that it will be around 3%,” he said.

The bank has held the 13.25% interest rates steady since July, when it paused after a series of hikes as data started showing the inflation rate stabilising, which lately registered a decline.

The business community said it was expecting a higher cut.

The bank also provided additional support to investment in response to the anticipated slowdown due to the pandemic, offering a new package of 100 billion rupees ($630.52 million) for investment in the manufacturing sector to fund investors at 7% percent for 10 years.

“This scheme will help counter any possible delays in the setting up of new projects that investors were planning prior to the Coronavirus outbreak,” the statement said.

The power sector is excluded from the scheme.

The bank will also refinance banks to provide 5 billion rupees ($31.53 million) at a maximum of 3% for the purchasing of equipment used to fight the coronavirus.

However, the central bank governor said Pakistan’s economic fundamental would remain strong enough to respond to reforms undertaken before the virus spread.

With sinking foreign reserves and a large current account deficit, Pakistan struck an agreement in April with the IMF for a $6 billion three-year rescue package.

Shahzad reported from Islamabad, Writing by Asif Shahzad; Editing by Alex Richardson, Editing by Angus MacSwan