Monetary Policy: State Bank of Pakistan Hikes 20% Interest Rate

The monetary policy interest rate has increased by 300 basis points to 20%, the highest level in 27 years, according to the State Bank of Pakistan (SBP). The details reveal that the desperate action was taken in order to obtain the crucial $1.1 billion loan from the International Monetary Fund (IMF).

The State Bank of Pakistan (SBP) opted to ‘postpone’ the meeting, which was initially set for March 16, 2023, in order to deal with the economic downturn, which included a record inflation number at a 50-year high of 31.5% in February.

The Monetary Policy Committee (MPC) voted to raise the policy rate by 300 basis points to 20% during its meeting on March 2, 2023. the State Bank of Pakistan stated. “The Committee had highlighted near-term risks to the inflation outlook from external and fiscal adjustments during the last meeting in January.”

The majority of these risks, it was stated, have come to pass and are partially reflected in February’s inflation outturns. The core inflation rate increased to 17.1 percent in the urban basket and 21.5 percent in the rural basket in February 2023, while the national CPI inflation rate has risen to 31.5 percent p/y.

The MPC highlighted in its meeting today that the most recent fiscal adjustments and exchange rate depreciation have significantly worsened the near-term inflation picture and substantially increased inflation expectations, as shown by the most recent round of surveys.

The Committee anticipates that inflation will continue to climb over the coming months as the effects of these adjustments become apparent before starting to slowly decline. As opposed to the November 2022 prediction of 21 to 23 percent, the average inflation this year is now anticipated to be in the range of 27 to 29 percent. In this regard, the MPC underscored the importance of anchoring inflation expectations and the need for a robust policy response.

Monetary Policy: State Bank of Pakistan Hikes 20% Interest Rate

The MPC stated that while the current account deficit (CAD) has significantly decreased, vulnerabilities still exist on the external side. The CAD dropped to $242 million in January 2023, which was its lowest amount since March 2021. Overall, the CAD decreased by 67 percent from the same time previous year to $3.8 billion in Jul-Jan FY23.

Despite this improvement, anticipated debt repayments, a drop in financial inflows amid rising international interest rates and internal uncertainty, and the exchange rate continue to put pressure on FX reserves.

The MPC stated that while foreign exchange reserves are still low, concerted efforts are required to strengthen the external position. The conclusion of the ongoing 9th review under the IMF’s EFF will assist in addressing short-term external sector challenges in this regard.

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