SBP raises Interest rate to 21%

The State Bank of Pakistan’s Monetary Policy Committee (MPC) has announced a 100 basis point increase in the key policy rate, bringing it up to 21%. The decision was made due to inflation in March 2023 rising to 35.4%, with expectations of remaining high in the near term. The committee noted that while there are indications of inflation expectations plateauing, they remain elevated.

The MPC views this decision as a crucial step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability. It is also noted that Pakistan’s financial sector remains broadly resilient, despite economic activity moderating.

The committee recognized three important developments having implications for the macroeconomic outlook. Firstly, the current account deficit has narrowed considerably, more than previously anticipated, mainly on the back of sizable import containment. Nonetheless, the overall balance of payments position remains under stress, with foreign exchange reserves still at low levels. Secondly, significant progress has been made towards the completion of the 9th review under the International Monetary Fund’s Extended Fund Facility program. Lastly, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions, making it more difficult for emerging market economies like Pakistan to access international capital markets.

While the committee considers the current monetary policy stance appropriate, it acknowledged that uncertainties attached to global financial conditions and domestic political situations pose risks to this assessment. Nonetheless, today’s decision, along with previous accumulated monetary tightening, is expected to help achieve the medium-term inflation target over the next 8 quarters.

It is essential to keep track of the developments in the macroeconomic outlook of Pakistan as it affects the country’s overall financial health. The MPC’s decision to increase the policy rate is a significant move to stabilize the economy amidst rising inflation. The committee’s observations provide valuable insight into the various factors that impact the country’s financial sector, and it is crucial to take note of them to make informed decisions.