SBP Monetary Policy: Interest Rate increased by 825 bps during the PDM government

As outlined in the SBP Act (Amended in 2021), the primary responsibility of the State Bank of Pakistan (SBP) is to ensure price stability and to carry out this responsibility the SBP Act also authorizes an independent Monetary Policy Committee (MPC) to set interest rates in the economy.

Currently, the MPC meets eight times a year to review the evolving macroeconomic developments particularly having implications for future inflation path and to accordingly set the interest rate or policy rate that it deems appropriate in achieving its objectives.

While deciding the interest rate policy, the MPC looks at the trends and outlook of a range of global and domestic economic variables.

Nevertheless, the prime consideration is the inflation outlook vis-a-vis its target. The other important consideration is to promote sustainable growth.

Since July 2022 to date under the government of multi-party Pakistan Democratic Alliance (PDM) led by Pakistan Muslim League-Nawaz (PML-N), the MPC has raised the policy rate by 825 basis points (bps) to reduce inflationary pressures and anchor inflation expectations.

Interest Rate during the PDM government

During the period, the inflationary pressures were emanating from multiple domestic and global supply shocks, exchange rate depreciation, increase in administrative prices and reversal of subsidies, flood related devastation and the consequent rise in food inflation.

The MPC was of the view that in order to keep inflation expectations anchored and achieve price stability, interest rates should increase.