The State Bank of Pakistan (SBP) on Friday raised its benchmark interest rate by 150 basis points to 8.75 per cent, as it grapples with rising inflation and uncertainty over a stalled International Monetary Fund (IMF) loan facility.
“The MPC (Monetary Policy Committee) was of the view that there is now a need to move swiftly to normalize monetary policy to counter inflationary pressures and maintain stability with growth,” the SBP said in a statement.
It added: “Looking forward, the MPC reiterates that the ultimate target of marginally positive real interest rates remains unchanged, and is expected to make measured moves to that end, given today’s move.”
Many analysts were expecting the central bank to raise rates, but the size of the hike was beyond most expectations.
The SBP further noted that since the last MPC meeting, inflationary pressures had increased significantly, with headline inflation rising from 8.4 per cent in August to 9 per cent in September and 9.2 per cent in October. It said this increase was primarily driven by higher energy costs and an increase in core inflation.
Therefore “Looking forward, potential and upward adjustments in global commodity prices and administered energy prices pose an upward risk of 7-9 pc of the average inflation forecast in FY22,” it said.
The SBP’s warning comes as the country’s large poor and middle class continues to have high inflation as prices of essentials like food and fuel climb ahead of the cold winter months.
With regard to the depreciation of the rupee, SBP said the currency has depreciated by 3.4 per cent since the last meeting of the MPC in September.
“The US dollar also appreciated against most emerging market currencies since May as expectations of dilution by the Federal Reserve are brought forward,” it said. “However, the fall in the value of the rupee since May has been comparatively large. With interest rates and other accommodative instruments, including the normalization of fiscal policy, pressure on the rupee should ease.
In addition, “consistently high” international commodity prices and strong domestic activity widened the current account deficit to $3.4 billion in Q1 FY22, SBP said.
“Despite some reduction in non-energy imports, the deficit widened to $1.66 billion in October from $1.13 billion in October due to higher energy prices and a spurt in imports of services. Exports and remittances also declined month-on-month. ,
According to SBP, the current account deficit for FY22 is expected to be slightly higher than the previous forecast of 2-3 per cent of GDP.
SBP is battling a depreciating rupee, high inflation and current account deficit, while investors have been stunned by the outcome of talks between the government and the IMF, which delayed the release of the next tranche of the $6 billion loan facility. ,
Last week, the central bank announced That it was raising the cash reserve requirement for banks by one percentage point, the first such move in more than a decade, in yet another attempt to tackle accelerating inflation.
SBP also did marked up On Wednesday, “recent unforeseen developments” stoked uncertainty as well as affecting the outlook for inflation and the balance of payments, prompting it to convene its policy meeting a week ahead of schedule.
in one Press releaseThe central bank had said that the MPC meeting will now be held on Friday (today) instead of the earlier announced date of November 26.
SBP was the last raised After being on hold for more than a year, interest rates were hiked by 25 basis points in September.
Earlier this week, the SBP also announced that it would increase the number of monetary policy decisions every year from six to eight, with the next set on December 14.