Daily Times

The State Bank of Pakistan, on Monday, decided to raise the policy rate by 100 bps to 22 percent for keeping real interest rate firmly in the positive territory amid recent developments.

The decision, effective form 27th June 2023, was taken in an emergency meeting of Monetary Policy Committee (MPC) convened here to review the overall economic situation particularly the potential effects of budgetary measures and relaxation in imports, said a statement issued here by the Central Bank.

The MPC in its meeting held on 12th June decided to maintain the policy rate unchanged at 21 % terming 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 in its emergency meeting, however, had noted two important domestic developments since the last meeting- certain upward revisions in taxes, duties and PDL rate in FY24 budget and withdrawal of SBP’s general guidance for commercial banks on prioritisation of imports- that have slightly deteriorated inflation outlook and which could potentially increase pressure on the already stressed external account, the statement said.

The measures have increased the upside risks to the inflation outlook, the MPC noted and viewed that additional tax measures were 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,” it further added. The MPC termed the decision as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis and hoped that it would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5 – 7 percent by the end of FY25, barring any unforeseen developments. The MPC viewed that its decision – along with the expected completion of the ongoing IMF program 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.