Another rate hike

Economic growth projections for upcoming fiscal year have already been revised down to between 3.5% and 4.5%

The SBP has announced another interest rate hike as it tries to bring down inflation and bring some semblance of stability to the economy. The 150 basis point hike, which takes the rate to 13.75%, comes on the back of a 250 basis point hike last month. While the actual impact on inflation remains to be seen, as international oil prices are still considered the biggest driver of the current high inflation trend, economic growth projections for the upcoming fiscal year have already been revised down to between 3.5% and 4.5%. The SBP has also increased rates on several loan facilities to discourage borrowing and encourage savings as the bank’s monetary policy committee pushed for fiscal consolidation to help improve the external account situation.

Interestingly, the SBP also called out the previous government’s energy subsidy package for further damaging the economy overall, while also citing the new Covid-19 wave in China for causing supply disruptions and further economic anxiety. However, the most concerning note for people hoping that these latest policy moves will have an immediate impact on inflation is the SBP’s flat admission that it will not. Inflation, it said, is likely to rise in the short run as foreign factors, like the Ukraine war, continue to impact the prices of fuel and food. In fact, the bank now expects inflation to remain “elevated” for all of the next fiscal year before “declining sharply” in the 2023-24 fiscal year.

Meanwhile, international instability means there is no guarantee that the rate hikes will stop the rupee’s falling worth. One of the rare positives is the news that the current account deficit has been reduced and will likely continue to fall as a result of the government’s new import curbs, coupled with steady growth in exports and remittances. Assuming that upcoming tranches from the IMF are released on time, this should also help reduce stress on forex reserves and allow for more resources to be focused on correcting domestic issues that have let the situation get so far out of hand, although this would also require a plethora of political crises to be addressed.

Published in The Express Tribune, May 25^th, 2022.

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