Pakistan is frantically trying to obtain the vital $1.1 billion in IMF funding, so the State Bank of Pakistan (SBP) raised the benchmark interest rate in an off-cycle review by a significant 300 basis points (bps), to 20%. (IMF).
In an effort to “anchor inflation expectations as it is critical and warrants a strong policy response,” the Monetary Policy Committee (MPC), which was established as a statutory committee under the State Bank of Pakistan Act, decided to raise the policy rate to its highest level since October 1996.
In order to combat rising inflation, the central bank increased the benchmark interest rate by 300 basis points (bps) today, bringing the total increase since January 2022 to 1,050 bps.
It should be noted that the SBP decided to “postpone” the MPC meeting from its original date of March 16, 2023 in order to deal with new economic risks, such as a record inflation rate that came in at a nearly 50-year high of 31.5% in February.
“During the last meeting in January, the committee had highlighted near-term risks to the inflation outlook from external and fiscal adjustments,” the Monetary Policy Statement (MPS) read. It further mentioned that most of these risks have materialised and are partially reflected in the inflation outturns for February.
Consumer price index (CPI)-based national inflation has risen to 31.5% on an annual basis, while core inflation increased to 17.1% in urban areas and 21.5% in a rural basket in February 2023.
The MPC noted in its meeting today that the most recent fiscal adjustments and exchange rate depreciation have significantly worsened the near-term inflation outlook and caused inflation expectations to continue to rise, as evidenced by the most recent wave of surveys.
The committee therefore anticipates inflation to increase further over the coming months as the effects of these adjustments become apparent before it starts to decline, albeit gradually. It also revised its prediction for this year’s average inflation, which is now anticipated.