The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) raised the benchmark policy rate by 150 basis points (bps) to 13.75 percent – the highest interest-rate level since 2011 when it stood at 14 percent – for the next six weeks to maintain the balance between inflation and economic growth.
In its monetary policy statement issued on Monday, the central bank said that it believes that this “effective action” was important to anchor inflation expectations and maintain external stability. “This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability,” the central bank added.
The SBP said that since the last MPC meeting, the provisional estimates suggest that growth in FY22 has been much stronger than expected. “External pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fuelled demand and lingering policy uncertainty has compounded pressures on the exchange rate.
“Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new Covid wave in China. As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.” The MPC said it was of the view that the interest-rate hike would help safeguard external and price stability.
“Since the last MPC meeting, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen, particularly at the short end. The MPC noted that the market rates should be aligned with the policy rate and in case of any misalignment after today’s policy decision, the SBP would take appropriate action.”
The statement added that headline inflation rose from 12.7% (y/y) in March to 13.4% in April, driven by perishable food items and core inflation. “The rise in core inflation reflects strong domestic demand and second-round effects of supply shocks,” it said.