The State Bank of Pakistan (SBP) further tightened its monetary policy on Tuesday, jacking up key policy rate by 100 basis points to a record high of 21% to control inflation.
The Monetary Policy Committee (MPC) — which was constituted as a statutory committee under the State Bank of Pakistan Act — decided to increase the policy rate to its highest level in an attempt to “anchor inflation expectations around its medium-term target — barring any unanticipated shock.”.
The SBP has raised rates by a total of 1,150bps, since January 2022.
The committee stated that since the last meeting — on March 2 — it has noted three important developments having implications for the macroeconomic outlook, which include:
- Current account deficit has narrowed considerably, more than previously anticipated
- Significant progress has been made towards completion of the 9th review under the IMF’s EFF programme
- Recent strains in global banking system have led to further tightening of global liquidity and financial conditions
“In this context, the MPC considers the current monetary policy stance appropriate, and stresses that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next eight quarters,” the Monetary Policy Statement (MPS) — issued after the committee’s meeting — read.
However, the Committee noted that uncertainties attached to the global financial conditions as well as the domestic political situation pose risks to this assessment.
The MPC noted that the surge in inflation was broad-based, though a large part of it was contributed by food and energy components this reflects the pass-through of increases in taxes and duties, unwinding of untargeted energy subsidies and the recent exchange rate depreciation.
“To anchor these expectations, the MPC views its current monetary policy stance as appropriate to keep the real interest rate in positive territory on a forward-looking basis,” the MPS read.
