Home Latest News State Bank of Pakistan Hikes Interest Rate to 12.25%

State Bank of Pakistan Hikes Interest Rate to 12.25%

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Central bank says decision taken to safeguard external stability and maintain price stability

The State Bank of Pakistan (SBP) on Thursday raised its benchmark interest rate by 250 basis points, from 9.75 percent to 12.25 percent, in a bid to safeguard external stability and maintain price stability.

The Monetary Policy Committee of the central bank convened an emergency meeting on Thursday as the Pakistani rupee dropped nearly Rs. 3 against the U.S. dollar in a single day due to political uncertainty, international commodity prices, and global financial conditions. Announcing its decision to raise the interest rate, the bank said it believed this would help safeguard external and price stability.

“Since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen,” it said in a press release. “Externally, futures markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions. On the domestic front, the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly,” it added.

According to the MPC, “strong exports and remittances” have seen February’s current account deficit shrink to $0.5 billion, its lowest level this fiscal year, but heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields. “In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments pertaining to settlement of an arbitration award related to a mining project,” it said, referring to the $900 million paid out as part of a settlement in the Reko Diq project, adding that some of this decline would reverse due to loans being rolled over.

The State Bank said that average inflation forecasts had been revised upwards to slightly above 11 percent in FY22, adding the current account deficit was expected to remain around 4 percent of GDP. “While the non-oil current account balance has continued to improve, the overall current account remains dependent on global commodity prices,” it added.

The MPC statement said that the increase to the interest rate should boost forward-looking real interest rates to “mildly positive,” adding the central bank was in the process of taking further actions to reduce pressures on inflation and the current account, including an increase in the interest rate on the export refinance scheme, and widening the set of import items subject to cash margin requirements.

“The announcement of these measures is expected soon and will complement the action taken by the MPC on interest rates today,” it added. “Importantly, the MPC highlighted that Pakistan’s external financing needs in FY22 are fully met from identified sources,” it said.

“Looking ahead, the MPC noted that today’s decisive actions, together with a reduction in domestic political uncertainty and prudent fiscal policies, should help ensure that Pakistan’s robust economic recovery from COVID-19 remains sustainable,” it added.

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