Home Latest News State Bank of Pakistan Raises Interest Rate to 9.75%

State Bank of Pakistan Raises Interest Rate to 9.75%

by Newsweek Pakistan

No Credit

In statement, central bank says decision aimed at countering inflation, addressing current account deficit, ensuring sustainable economic growth

The State Bank of Pakistan on Tuesday increased the benchmark interest rate by 100 basis points to 9.75%, maintaining this will counter inflationary pressures, address the widening current account deficit, and ensure that economic growth remains sustainable.

“Looking ahead, the MPC [Monetary Policy Committee] expects monetary policy settings to remain broadly unchanged in the near-term,” it said in a statement issued after the MPC meeting that decided on the interest rate hike. “Given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved,” it added.

This is the second time that the SBP has increased the benchmark policy rate within the past 30 days. On Nov. 19, the central bank had hiked the interest rate by 150 basis points to 8.75%, stressing this was intended to curtail inflation. In its statement, it said that inflation and the trade deficit had both spiked in the past month “due to both high global prices and domestic economic growth.”

The central bank noted that economic growth “remains robust” based on domestic demand indicators of electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, as well as continued strength in imports and tax revenues. It especially credited the outlook for agriculture, and robust growth in sales tax on services, saying this suggested the tertiary sector was “recovering well.” It reiterated that GDP growth for the current fiscal was projected to be in the 4-5 percent range.

On the widening current account deficit, owed largely to increases to imports and global commodity prices, the State Bank said the current forecast was for the CAD to hit around 4 percent of GDP, “somewhat higher than earlier projected.” However, it said, that the current account and trade deficit figures were expected to “gradually moderate” in the second half of the current fiscal, as global prices normalize. “In addition, recent policy actions to moderate domestic demand—including policy rate hikes and curbs on consumer finance—and proposed fiscal measures, should help moderate growth in import volumes through the rest of the year,” it added.

It claimed that the current account deficit was expected to be fully financed from external inflows, adding that resultantly foreign exchange reserves should remain at adequate levels through the rest of the fiscal year.

The central bank said the government’s planned “mini-budget”, which is expected to eliminate certain tax exemptions and reduce current and development expenditures, would help moderate domestic demand, improve the current account outlook, and complement recent monetary policy actions.

It said that inflation had continued to increase in the past month, and it was expected that it would average 9-11 percent this fiscal year. “The pick-up in inflation has been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors,” it said, claiming that it was likely to remain within the revised forecast range for the remainder of the fiscal year. “Subsequently, as global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5-7 percent during FY23,” it said.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth,” it added.

Related Articles

Leave a Comment