The benchmark interest rate was increased by the State Bank of Pakistan (SBP) on Monday by 100 basis points to 17%, the highest level since October 1997, in accordance with market forecasts.
SBP Governor Jameel Ahmad, in his maiden monetary policy press conference after assuming charge in August, revealed that the committee has observed that “inflationary pressures are persisting and continue to be broad-based”.
“If these remain unchecked, they could feed into higher inflation expectations over a longer than-anticipated period therefore the Monetary Policy Committee (MPC) stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future,” he further explained.
In order to combat growing inflation, the central bank increased the benchmark interest rate by 100 basis points (bps) today, bringing the total increase to 1,000 bps since September 2021.
Three significant economic factors led the MPC, which was established as a statutory committee under the State Bank of Pakistan Act, to decide to raise the key benchmark rate:
- Inflation
- External sector challenges
- Global economic conditions
The governor went on to explain how each of the aforementioned elements contributed to inflation continuing to be high despite modest stabilisation in November and December. The past 10 months have seen a rise in core inflation, which is significant.
Moreover, notwithstanding the policy-induced decline in the current account deficit, the external sector is now facing more immediate difficulties. He claimed that ongoing debt repayments and a lack of new financial inflows had caused a steady decline in government reserves.
The MPC also took note of the fact that the near-to-short term global economic and financial conditions are expected to remain generally unsettled, with conflicting effects on the domestic economy.
In its monetary policy statement, the central bank went on to say that the outlook for exports and worker remittances for emerging economies, including Pakistan, could be adversely affected by the anticipated slowdown in global demand.
“This would partly offset the gains from the import contraction. On the flip side, some moderation in international commodity prices may help reduce inflation and the improvement in global financial conditions may also provide some relief to the external sector,” he said.
