State Bank increases policy rate from by1pc to 16pc

The State Bank of Pakistan (SBP) on Friday increased the policy rate by I percent from 15 to 16 percent, as it cited high inflation which is continuous and more than expectations.

Amid the prevailing economic situation, it was already expected that there won’t be any cut in the policy rate, but the State Bank instead decided to increase the same.

The announcement came after a meeting of the SBP’s Monetary Policy Committee (MPC) as the central bank identified higher food and core inflation as “key contributors” to alarming rise in inflation.

It said the decision to hike the policy rate by 100 basis points (1 percent) was aimed at ensuring that “elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis”.

According to the central bank, the projections about around 2 percent growth and a current account deficit of nearly 3 percent of the GDP for the financial year 2022-23 shared in the last monetary policy statement have been maintained.

The reason for this, the SBP says, is incorporating the Post-Disaster Needs Assessment of the floods and latest developments.

Moreover, the SBP press release notes that the decision to raise the policy rate reflected the MPC’s view that “inflationary pressures have proven to be stronger and more persistent than expected”.

About the increase in inflation, the MPC says the trend is “increasingly being driven” by persistent global and domestic supply shocks that are raising costs amid the ongoing economic slowdown.

“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth. As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.

“The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched. At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority,” the press release reads.

About the overall inflation outlook, the MPC said while inflation was likely to be more persistent than previously anticipated, it was “still expected to fall toward the upper range of the 5-7pc medium-term target by the end of FY24” due to support from “prudent macroeconomic policies, orderly rupee movement, normalising global commodity prices and beneficial base effects”.

The press release also mentions three important developments since the last meeting: increase in headline inflation, especially because of higher food prices; a sharp decline in imports resulting in led to a “significant moderation” in the current account deficit; and average inflation for 2022-23 projected to be at 21 to 23 percent due to higher food prices and core inflation.

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