KARACHI, Pakistan: The State Bank of Pakistan (SBP) has decided to raise the policy rate by 100 basis points to 16 percent.
The decision was taken by the Monetary Policy Committee (MPC) in its meeting held in Karachi on Friday, reflecting stronger inflationary pressures and more persistent than expected.
The increase in policy rate is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis.
Amid the on-going economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs.
In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth.
As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.
The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched.
At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority.
Since the last meeting, the MPC noted three key domestic developments;
First, headline inflation increased sharply in October 2022 as the previous month’s administrative cut to electricity prices was unwound. The food prices have also accelerated significantly due to crop damage from the recent floods, and core inflation has risen further.
Second, a sharp decline in imports led to a significant moderation in the current account deficit in both September and October. Despite this moderation and fresh funding from the Asian Development Bank (ADB), external account challenges persist.
Third, after incorporating the Post-Disaster Needs Assessment of the floods and latest developments, the FY23 projections for growth of around 2 percent and a Current Account Deficit (CAD) of around 3 percent of GDP shared in the last monetary policy statement are re-affirmed.
However, higher food prices and core inflation are now expected to push average FY23 inflation up to 21-23 percent.