SBP cuts Interest Rates by 100 bps: 13.25% to 8%

From hawks to doves. SBP has demonstrated an inverted U curve with a 525 bps cumulative cuts. More prominent is “economic growth” over “inflation-targeted” Monetary Policy. Textbook monetary policies are out-dated.

What’s relevant is the heart-beat of the economy; businesses survival. Ensuring “liquidity” issues don’t turn into “solvency” issues. Loss of jobs is in colossal numbers globally. Increasing Savings Ratio & strengthening FX reserves can be kicked down the lane.

Apart from maintaining financial stability, reducing cost of business & encouraging borrowings to remain afloat, the 525 bps cut drastically reduces the cost of servicing government debt. This year the fiscal deficit may near ~10%.

The reduction in Petrol/Diesel prices have cushioned the inflation outlook. That may reverse in next few months, if government doesn’t reduce the levies. Any potential rise in imports is months away given the sluggish growth in the economy as the lock-down ends. SBP remains “forward looking”, “data-backed” & “supports the economy”. Pressure on currency may not be material.

Expect the stock market to perceive it positively. Leveraged, growth and cyclical companies stand to garner traction these days before the Eid holidays.

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