ISLAMABAD: In a surprising move, the State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) announced on Monday a 100 basis points increase in the policy rate, bringing it to 22% folloing the lifting of ban on imports.
This decision comes despite the central bank’s repeated claims of not raising interest rates recently and marks a total increase of 1,250 basis points since January 2022 when the rate was below 12%.
1/3 MPC of #SBP convened an emergency meeting today, where it noted that potential upside risks to the inflation outlook have increased from the last meeting, and accordingly decided to raise the policy rate by 100bps to 22%.https://t.co/unuS6xmJHz#SBPMonetaryPolicy pic.twitter.com/FWenKLqdkt
— SBP (@StateBank_Pak) June 26, 2023
The MPC clarified in a statement that, in its previous meeting on June 12, it had decided against raising the policy rate. However, due to the objective of achieving price stability and controlling high inflation, the committee determined that an increase was now necessary.
The SBP attributed the rate hike to significant domestic developments that have slightly worsened the inflation outlook and could further strain the already stressed external account.
One contributing factor was the recent upward revisions in taxes, duties, and the PDL rate in the FY24 budget approved by the National Assembly on June 25.
Additionally, the SBP withdrew its general guidance for commercial banks on import prioritization on June 23, a move necessitated by ongoing negotiations with the International Monetary Fund (IMF). However, this withdrawal has increased the risk of heightened inflation.
The committee acknowledged that the additional tax measures could directly and indirectly contribute to inflation, while the relaxation in imports may exert pressure on the foreign exchange market and potentially lead to a greater-than-expected exchange rate pass-through effect on domestic prices.
Against this backdrop, the MPC convened an emergency meeting to address these developments and decided to raise the policy rate by 100 basis points to 22%, effective from June 27, 2023.
The SBP emphasized that this decision is crucial for maintaining a positive real interest rate on a forward-looking basis.
The SBP believes that this move will help anchor inflation expectations and support the efforts to bring down inflation towards the medium-term target of 5-7% by the end of the fiscal year 20240-25. Additionally, the committee considers that this decision, along with the expected completion of the ongoing IMF programme and the government’s commitment to generating a primary surplus in the fiscal year 2023-24, will contribute to addressing external sector vulnerabilities and reducing economic unrest.
