The SBP took time to speed up; but did it in style. Pundits were critical of SBP for not being ahead of the curve. The institution waited for the right information to come in. And it took no time to act. Like it was in Jul-19. At that time, SBP increased the rates and adjusted the currency in one go. Then took a pause. Now with this COVID-19, scenarios are changing every day.

Many economies today have real rates in the negative. The SBP was concerned on the external front. Big payments were coming up while outflows were rampant. Now with G20 decision on restructuring loans and IMF support of $1.4 billion, the external vulnerabilities are over in the short term. The growth is in the negative this year and will be slow in the next. There are no demand side pressures. Businesses have huge liquidity problems.

The real interest rates are brought to almost zero on forward looking inflation. The rates are negative on today's inflation. Market was expecting 200 bps cut in the next 2 policy reviews. The SBP is again ahead of the curve.

The world is in recession. There is negative growth and low inflation. No demand side pressure. Commodity prices are likely to remain suppressed. Inflation outlook is low. There could be supply side temporary shocks; but second round impact is not visible. Unemployment is high and wages are likely to remain low. Thus, inflation may come down faster than expectations.

Low rates will give much needed fiscal space. This might not have any impact on primary balance. Lower interest payments will surely give space on spending towards boosting economy and feeding poor. Interest rates have come down by 425 bps since last month. That will ease annualized basis of about Rs800-1,000 billion of interest payment savings.

The key is external account at the moment. The current account is likely to be in (marginal) surplus in this quarter. Imports and exports both are significantly down. Remittances may remain resilient in short term. Low oil prices and other commodity prices along with slow (or negative) domestic growth will keep imports low. Exports are not likely to recover till Europe and the US are opened up.

The fear of rate cut would have been a pressure on currency. But buffers are being created. An estimated $3 billion is anticipated from the IMF, WB and ADB. The financial account is likely to remain stable after restructuring of G20 and other loans. The currency may be a bit volatile; but should stabilize soon. It is likely to come back to its fundamental range of PKR/USD 155-165.