KARACHI, Pakistan: The State Bank of Pakistan (SBP) has raised the policy rate by 150 basis points to 13.75 percent which is the highest since April 2009.
In a statement on Monday following the meeting of the Monetary Policy Committee (MPC) which decided to raise the policy rate by 150 basis points to 13.75 percent, the state bank said that this action, together with much-needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.
Since the last MPC meeting, provisional estimates suggest that growth in FY22 has been much stronger than expected.
Meanwhile, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty has compounded pressures on the exchange rate. Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new COVID wave in China.
As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.
After contracting by 0.9 percent in FY20 in the wake of COVID, the economy has rebounded much more strongly than anticipated, growing by 5.7 percent last year and accelerating to 5.97 percent this year, as per provisional estimates.
At 13.4 percent (y/y), headline inflation unexpectedly rose to a two-year high in April and has now been in double digits for six consecutive months. Inflation momentum was also elevated, at 1.6 percent (m/m), and core inflation rose further to 10.9 and 9.1 percent in rural and urban areas, respectively.
On the external front, notwithstanding some encouraging moderation in the current account deficit during April, the Rupee depreciated further due both to domestic uncertainty as well as recent strengthening of the US dollar in international markets following tightening by the Federal Reserve.
The MPC’s baseline outlook assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies together with normalization of the petroleum development levy (PDL) and GST taxes on fuel during FY23.
Under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year.
Thereafter, it is expected to fall to the 5-7 percent target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalization of global commodity prices, and beneficial base effects.
Considering the balance of risks around this baseline, the MPC felt it was important to take effective action to anchor inflation expectations and maintain external stability.
In addition to today’s policy rate increase, the interest rates on EFS and LTFF loans are also being raised.
Going forward, to strengthen monetary policy transmission, these rates will be linked to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports.
At the same time, the MPC emphasized the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account.
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