The State Bank of Pakistan (SBP) is expected to increase the policy rate by 100-200 basis points (bps) for the next six weeks in view of the country’s economic situation and historically high inflation readings. .
Financial pundits expect the Monetary Policy Committee (MPC) – which is empowered to take decisions based on macroeconomic fundamentals – to rein in historic highs at a review of its key policy rate today (April 4). It will take up to 21-22 percent. Inflation.
On March 2, the central bank raised its key rate by 300 basis points to a record high of 20 percent, much higher than market expectations, possibly due to its release by the International Monetary Fund ( (IMF) will fulfill an important need. Pending bailout funds
The market expects the MPC — set up under the SBP Amendment Act — to raise benchmark interest rates at today’s meeting as the country struggles to curb stubborn inflation.
Monetary Policy Committee of #SBP will meet on Tuesday, April 04, 2023 to decide about the Monetary Policy. #SBP will issue the Monetary Policy Statement through press release on same day.https://t.co/yWtRbsj5Nj pic.twitter.com/4nLPrhulsd
— SBP (@StateBank_Pak) March 31, 2023
The country recorded a record high annual inflation of 35.4 percent in March while core inflation, which is estimated to exclude volatile energy and food prices, was 18.6 percent in urban areas and 23.1 percent in rural areas in March. increased to percent.
The market’s reaction to rising inflation is reflected in the recent rise in bond market rates, driven by investors’ bullish outlook.
State Bank has raised a total of 10.25%, 1,050bps since January 2022.
According to a survey conducted by Arif Habib Limited, 57.7 percent of the total respondents said that the State Bank will increase the policy rate, including:
- 30.8% are expecting a 100bps rate hike.
- 26.9% are predicting a rate hike of 200 bps.
Meanwhile, 42.3 percent of the total respondents believed that the policy rate would remain at 20 percent.
The expected increase in the policy rate will make bank financing more expensive. This could reduce the demand for foreign financing for imports and help stem the sharp decline in foreign exchange reserves, which have fallen to a record low of $4.2 billion.
The main purpose of increasing the policy rate is to discourage borrowing by the private sector as any increase in currency in circulation raises inflation.
It should be noted that as per the six-month advance calendar released by the Central Bank in December 2022, the MPC meeting was originally scheduled to be held on April 27, but the State Bank decided to call an off-cycle review last month and Brought it forward too. April meeting.
The cash-strapped country is taking key steps to secure IMF funding, including raising taxes, removing blanket subsidies, and artificially fixing the exchange rate. While the government expects a deal with the IMF soon, media reports say the agency expects to raise policy rates.
The revival of the IMF’s loan program will help mobilize $3-4 billion from multilateral and bilateral lenders, including the IMF, and stabilize foreign exchange reserves in the short term.
