KARACHI, Pakistan — In an effort to limit runaway inflation, the State Bank of Pakistan (SBP) raised its benchmark policy rate by 150 basis points to 8.75 percent on Friday.
The Monetary Policy Committee (MPC) voted to raise the policy rate by 150 basis points to 8.75 percent at its meeting on Friday. This reflected the MPC’s assessment that, since the previous meeting, risks relating to inflation and the balance of payments had grown while the outlook for growth had improved.
The increased risks associated with inflation and the balance of payments are caused by both global and domestic forces. Price pressures from Covid-induced supply chain disruptions and increasing energy prices are proving to be greater and longer-lasting than previously predicted throughout the world. As a result, central banks have typically began to tighten monetary policy in order to keep inflation expectations stable. High import costs have also led to higher-than-expected CPI, SPI, and core inflation figures in Pakistan.
At the same time, there are developing evidence of demand-side pressures on inflation, and corporate inflation expectations have grown as a result of further upside risks from domestic administered pricing.
In terms of the balance of payments, the current account deficits in September and October were bigger than expected, indicating increased oil and commodity prices as well as robust domestic demand. The rupee has borne the brunt of the burden of responding to these foreign pressures.
As a result of these changes, the risk balance has changed quicker than projected away from growth and toward inflation and the current account. As a result, the MPC believes that it is now necessary to move more quickly to normalise monetary policy in order to contain inflationary pressures and maintain stability with growth. Today’s rate hike is a significant step in this direction. In terms of the future, the MPC emphasised that the overall aim of moderately positive real interest rates remains intact and that, given today’s move, it intends to take incremental steps toward that end.
The MPC reviewed significant trends and prospects in the real, external, and fiscal sectors, as well as the consequent forecast for monetary conditions and inflation, in making its conclusion.