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State Bank Of Pakistan Raises Key Policy Rate By 300 Basis Points To 20%
The State Bank of Pakistan on Thursday raised the key policy rate by 300 bps to 20% as the country battles the highest inflation rate in nearly 50 years.

State Bank Of Pakistan Raises Key Policy Rate By 300 Basis Points To 20%

On March 2, 2023, Pakistan’s Monetary Policy Committee (MPC) decided to increase the policy rate by 300 basis points to equal the all-time high rate of 20 percent according to a The State Bank of Pakistan (SBP) press release.

Interest rates at the Central Bank reach 20% for the first time in 27 years.

According to sources The International Monetary Fund (IMF) favored Pakistan having a policy rate similar to the nation’s core inflation.

The Committee highlighted near-term risks to inflation from external and fiscal adjustments at its last meeting in January. The inflation outturn for February partially reflects these risks. As of February 2023 national Consumer price index (CPI) inflation has surged to 31.5 percent year-over-year, while core inflation has increased to 17.1 percent for urban baskets and 21.5 percent for rural baskets.

At today’s gathering Pakistan’s Monetary Policy Committee (MPC) noted that recent budgetary modifications and depreciations in the Foreign exchange rate have resulted in a distinct decrease in the short-term inflation prognosis. Further, surveys reflect that expectations of inflation have increased. The Committee envisages that inflation will go up further over the upcoming months due to these changes before declining, though at a gradual speed.

This year’s average inflation is now projected within 27 – 29 percent compared to 21 – 23 percent which was estimated for November 2022. In this context, Pakistan’s Monetary Policy Committee (MPC) underlined that fixing inflation expectations is vital and requires an uncompromising policy reaction.

Pakistan’s Monetary Policy Committee (MPC) acknowledged the reduction in the current account deficit to $242 million in January 2023, its lowest level since March 2021. Cumulatively The current account deficit (CAD) for Jul-Jan FY23 is down 67 percent from last year. However scheduled debt payments and dwindling financial inflows due to rising global interest rates and domestic uncertainties continue to put pressure on Forex reserves and the exchange rate.

With Forex reserves remaining low concerted efforts are necessary to improve the external situation. Therefore, concluding the 9th review under The International Monetary Fund (IMF) Extended Fund Facility (EFF) can help address short-term external sector issues. What’s more urgent energy conservation measures are vital to lighten pressure on the external account and meet other sectors’ import demands.

The recent introduction of fiscal measures such as increases in General Sale Tax (GST) and Excise duties subsidy reduction and adjustments to energy prices are expected to aid in controlling the widening fiscal and primary deficits. It reinforces earlier statements that fiscal consolidation is needed for economic stability and will work in tandem with the current monetary tightening regime with a view to achieving price stability over time.

The Committee further underlined that any substantial deviation from the agreed path could adversely affect the effectiveness of monetary policy in attaining this objective.

Pakistan’s Monetary Policy Committee (MPC) looked into the consequences of further monetary tightening on both financial stability and short-term growth. The risks to stability have been judged as contained due to financial institutions possessing adequate capitalization.

A conflict between growth and inflation exists yet the Committee believes that bringing down inflation sooner rather than later will be more beneficial in the long run. Should unforeseen circumstances not come into play the real interest rate should now shift positively in the future which should encourage inflation expectations and ultimately guide it towards 5 – 7 % by Fiscal Year 2025.

Including net reserves held by banks other than The State Bank of Pakistan (SBP) the country held $9.267 billion in liquid foreign currency reserves an increase of $541.4 million over last week. As of the end of the week, State Bank of Pakistan had net reserves of $5.453 billion, a decrease of $14.2 million.

As a result of a commercial loan from the China Development Bank, the reserves increased.

In recent months, the central bank reserves have decreased significantly from nearly $18 billion at the beginning of 2022, highlighting Pakistan’s urgent need to complete the next International Monetary Fund (IMF) review.

Instead of the intended date of April 27, 2023, the following MPC meeting is scheduled for April 4, 2023. The head of equity research stated that there was too much ambiguity at this time to make a claim in response to a question about the anticipated rise in the upcoming meeting. By seeing how inflation changes, the choice will become more obvious.

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