Policy rate hike

With Parliament on hiatus, the SBP held a Monetary Policy Committee (MPC) meeting almost two weeks ahead of schedule, where it was decided to hike interest rates to try and control rampant inflation. The bank also noted additional causes for concern, specifically external stability, which has largely been driven by the war in Ukraine and high oil prices. However, the SBP also noted that several other state banks, including the US Federal Reserve, are expected to, or already have, significantly raised interest rates as a direct response to the Ukraine war and oil prices. The bank was also “surprised” by the inflation numbers for March, which is hardly reassuring for the millions of citizens whose buying power has disappeared in recent months.

And despite the rate hike, the SBP continues to revise inflation for the ongoing year upwards, currently estimating that the number will exceed 11% for the fiscal year. The bank also noted that “heightened domestic political uncertainty” contributed to the decline of the rupee and surge in local bond and Eurobond yields. Another concern is that Pakistan’s sovereign debt remains in “distressed debt” territory, according to news reports based on data from JP Morgan Chase. That label means that banks and other investors consider Pakistan to be at high risk of defaulting on its debt, and the country must offer unusually high returns on financial instruments to make them attractive, which further worsens the debt cycle. Meanwhile, foreign reserves remain under pressure as previously planned bond sales have been delayed, and refinancing with China has not been completed.

We should also note that while the MPC met two weeks early, it had noted in its March meeting that a snap meeting could be called if oil prices and other international factors continue to worsen. Unfortunately, few experts see any resolution to the Ukraine war which lets Russia fully reintegrate with the world economy, and the war’s impact on oil and food prices and global logistics is expected to linger past any future peace deal. Couple that with the highly likely continuation of domestic political uncertainty, and we may end up needing weekly MPC meetings.

Published in The Express Tribune, April 9^th, 2022.

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