In line with market expectations, the State Bank of Pakistan (SBP) on Monday raised the benchmark interest rate by 100 basis points to 17 percent, the highest since October 1997.
State Bank Governor Jameel Ahmed revealed in his first monetary policy press conference after taking charge in August that the committee observed that “inflationary pressures persist and continue to be broad-based”.
“If they are not curbed, they could increase inflation expectations over the expected period and hence the Monetary Policy Committee (MPC) stressed that they should be used to anchor inflation expectations and stabilize prices. Achieving the goal is necessary to support sustainable development in the future,” he further explained.
The central bank today hiked the benchmark interest rate by 100 basis points (bps), taking the total increase to 750 bps since January 2022 to counter rising inflation.
The MPC – which was constituted as a statutory committee under the State Bank of Pakistan Act – decided to raise the key benchmark rate due to three key economic developments:
- Inflation
- Challenges of the external sector
- Global economic conditions
Explaining each of the above-mentioned factors individually, the governor said that despite some moderation in November and December, inflation remains high. Importantly, core inflation has been on an upward trend for the past 10 months.
Moreover, despite the policy-led contraction in the current account deficit, the near-term challenges for the external sector have increased. “The lack of fresh financing and ongoing debt repayments have led to a steady decline in government reserves,” he said.
The MPC also took note of global economic and financial conditions that are broadly uncertain in the near to short term, resulting in mixed effects on the domestic economy.
The central bank further explained in its monetary policy statement that the expected slowdown in global demand could negatively impact exports and labor remittances for emerging economies, including Pakistan.
“This will partially offset the gains from import contraction. On the other hand, some moderation in international commodity prices may help moderate inflation and improving global financial conditions will also help the external sector. There may be some relief,” he said.
‘IMF Review Important to Reduce Uncertainty’
The Legal Committee noted that it reiterated its November 2022 assessment that the short-term costs of reducing inflation are lower than the long-term costs of allowing it to strengthen.
He also stressed engagement with multilateral and bilateral partners to overcome domestic uncertainties and address near-term challenges in the external sector.
In this regard, the MPC described the completion of the pending ninth review under the IMF’s External Fund Facility (EFF) as important to “reduce uncertainty” and open up multilateral and bilateral inflows.
‘Inflation must be curbed’
In its forward guidance, the MPC emphasized that anchoring inflation expectations is critical to achieving the medium-term inflation target of 5-7% by December 2024 and “coordinated monetary and fiscal policy.” Policy efforts are needed.”
Broad money growth decelerated in the first half (July-December) of the 2022-23 fiscal year, “mainly reflecting pressure on the external account”, the statement said.
On the other hand, domestic credit expanded due to a seasonal increase in private sector credit as well as an increase in budgetary borrowing due to a reduction in external financing.
“Separate analysis of private sector credit reveals moderation in consumer finance for retirement and working capital and fixed investment loans.”
Regarding the inflation outlook, uncertainty over their future path and the expected near-term adjustment are major downside risks to the inflation outlook.
“Reflecting these concerns, consumer and business inflation expectations in the latest Pulse survey have moved upward over the short to medium term,” the statement said.
