SBP jacks up policy rate by 100bps to 22%

MPC notes potential upside risks to inflation outlook have increased from last meeting on June 12

Salman Siddiqui June 26, 2023
A Reuters file image of SBP logo


Fulfilling another demand of the International Monetary Fund (IMF) to revive its loan programme, Pakistan's central bank has jacked up its key policy rate by 100 basis points to a new record high at 22 per cent in an emergent meeting on Monday.

The rate would become effective from June 27 (today).

Besides, the bank projected that the rupee may lose its value against the US dollar in the wake of reopening all imports with effect from last Friday (June 23).

State Bank of Pakistan (SBP) in its latest monetary policy statement (MOS) said the increase in its benchmark policy rate was inevitable considering the inflation reading was likely to spike, going forward.

Earlier, the country recorded six-decade-high inflation reading at 38 per cent in May 2023. The inflation number for the month of June would be reported in the initial days of July.

The bank has revised the policy rate to 22 per cent just two weeks after leaving it unchanged in its previous scheduled meeting held on June 12.

Earlier, it said the rate at 21 per cent was appropriate to control the inflation reading, adding the inflation data for May was in line with its expectations.

The bank hoped the reading would go high in the month and fall in June and onwards.

Read SBP interest rate stands unchanged at record high 21%

The historically high policy rate has been making banks' financing exorbitantly expensive, badly discouraging the private sector to borrow from banks to run businesses.

The high-interest rate has caused a fall in economic activities to 0.3 per cent in the outgoing fiscal year 2023 compared to a growth of 6.1 per cent in FY22.

The bank said on its official Twitter handle, "MPC (monetary policy committee) of SBP convened an emergency meeting today (Monday), where it noted that potential upside risks to the inflation outlook have increased from the last meeting (June 12, 2023), and accordingly decided to raise the policy rate by 100 basis points to 22%".

MPC views these risks as mainly coming from the implementation of new measures in the fiscal and external sectors, which are important in the context of the completion of the ongoing IMF programme.

The central bank noted that today’s (Monday) action is necessary to keep the real interest rate firmly in positive territory on a forward-looking basis that would help in bringing down inflation towards the medium-term target of 5 per cent to 7 per cent by the end of the fiscal year 2025.

In the statement after its meeting held on June 12, the MPC viewed the then monetary policy stance as appropriate to achieve the objective of price stability "barring any unexpected domestic and external shocks".

The MPC further noted that this outlook was "contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities".

The committee, however, observed two important domestic developments since the last meeting that have slightly deteriorated the inflation outlook and which could potentially increase pressure on the already stressed external account.

First, there are certain upward revisions in taxes, duties and PDL (petroleum development levy) rate in FY24 budget as approved by the National Assembly on June 25.

Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritisation of imports, meaning all imports have been fully reopened with immediate effect.

"While the MPC views these measures as necessary in the context of the completion of the ongoing IMF programme, they have increased the upside risks to the inflation outlook," the SBP monetary policy statement reads.

Read more PSX spikes in renewed hopes of IMF revival

The central bank's committee (MPC) views that "additional tax measures are likely to contribute to inflation both directly and indirectly, while the relaxation in imports may exert pressures in the foreign exchange market. The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices".

The exchange rate slightly improved by 0.01 per cent, or Rs0.03, to Rs286.71 against US dollar in inter-bank market on Monday which was the first session after reopening of the imports.

The government is making efforts to revive IMF programme before it officially expires on June 30, 2023.

Earlier, it had fixed functioning of domestic currency markets, reopened imports and revised its budget 2024 in line with the IMF recommendation.

But, it is yet to fully arrange gap financing of $6 billion from friendly countries that is one of the three main conditions of IMF to revive its programme.

The MPC views that Monday's decision – along with the expected completion of the ongoing IMF programme and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty.

The committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term.


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