Saturday, February 4, 2023

Pakistan State Bank raises interest rate to 16% to curb inflation

Pakistan’s central bank decided to increase the key policy rate by 100 basis points to 16 percent on Friday to prevent inflation from spiraling out of control. This is the highest rate since 1999.

“At today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 16 percent,” said a statement released by the central bank. “The decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.”

The SBP said it had taken the decision to ensure that elevated inflation should not get entrenched and begin to risk financial stability, adding that it wanted to pave the way for higher growth on a more sustainable basis.

The SBP identified higher food and core inflation as “key contributors” to elevated inflation.

The central bank noted three key domestic developments:

  1. The headline inflation increased sharply in October, as the previous month’s administrative cut to electricity prices was unwound. Food prices also “accelerated significantly” due to crop damage from the recent floods and core inflation rose further.
  2. A sharp decline in imports led to a “significant moderation” in the current account deficit in both September and October. It added that external account challenges persist despite this moderation and fresh funding from the Asian Development Bank.
  3. The FY23 projections for growth of around 2 percent and a current account deficit of around 3 percent of GDP are reaffirmed but higher food prices and core inflation are now expected to push average FY23 inflation up to 21-23 percent

However, in a meeting with analysts after the policy announcement, SBP Governor Jameel Ahmad said Pakistan’s foreign exchange reserves would be much higher compared to current levels by the end of the fiscal year. The governor also told analysts that Pakistan would repay its 2022 Sukuk Eurobond on Dec 2, three days before its maturity on December 5.

The State Bank of Pakistan (SBP) earlier increased the interest rate by 1.25 percent to 15 percent in July this year.

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