Following the market forecasts and in an effort to curb inflation, the State Bank of Pakistan (SBP) raised its benchmark policy rate by 150 basis points on Friday.
While the market had anticipated a rate hike, several analysts predicted that the central bank would be quite aggressive in its efforts to rein in a ballooning current account deficit and rupee depreciation as a result of the global financial crisis.
Earlier in the day, the central bank released data about the country’s current account, which showed a deficit of $1,663 million for the month of October 2021, compared to a surplus of $448 million in the same month the previous year.
A tool for controlling inflation, regulating unwarranted fluctuations in currency rates, and providing guidance to the national economy, interest rates are used by central banks around the world to achieve these goals.
Economists and industry experts talk a lot about the impact this will have on markets, but what about everyday consumers?
SBP’s decision may have an impact on the cost of housing and even student loans, as well as the interest rate on your credit card. When the central bank raises interest rates, a wide range of other costs rise as well.
According to Zubair Motiwala, an increase in interest rates will have a negative impact on the stock market in the near future. Investors will refrain from making any additional investments. He referred to the interest rate increase as the country’s “first gift of independence” following the passage of a central bank bill by the National Assembly.
“At today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 8.75 percent. This reflected the MPC’s view that since the last meeting, risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve,” SBP said in its policy announcement.
Furthermore, it stated that price pressures caused by Covid-induced disruptions to supply chains, as well as higher energy prices, are proving to be larger and longer-lasting than previously anticipated in various parts of the world.
“In Pakistan, too, high import prices have contributed to higher-than-expected CPI, SPI, and core inflation outturns. At the same time, there are also emerging signs of demand-side pressures on inflation, and inflation expectations of businesses have risen on account of further upside risks from domestic administered prices. With respect to the balance of payments, the current account deficits in September and October have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand. The burden of adjusting to these external pressures has largely fallen on the rupee”, SBP statement said.
According to the SBP, the meeting was brought forward from its original date of December 31st “in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments, as well as to assist in reducing the uncertainty about monetary settings currently in place in the market.”
In September, the central bank increased the benchmark policy rate by 25 basis points, bringing it to 7.25 percent. Several analysts predicted that the central bank would raise interest rates even more aggressively in December.
In a separate announcement, the SBP stated that the number of MPC meetings would be increased from six to eight times per year, “in accordance with international best practices.”
“In continuation of efforts to make the process of monetary policy formulation more predictable and transparent in line with international best practices, the State Bank of Pakistan (SBP) has decided to increase the frequency of monetary policy reviews from six (6) to eight (8) times a year. This action will bring the frequency of meetings in line with that incomparable emerging markets. It will also help to enhance the predictability of monetary policy actions,” the SBP statement said.
In the next five meetings of the MPC, the following schedule is in effect:
1. December MPC meeting: Tuesday, 14th Dec 2021
2. January MPC meeting: Monday, 24th Jan 2022
3. March MPC meeting: Tuesday, 8th Mar 2022
4. April MPC meeting: Tuesday, 19th Apr 2022
5. June MPC meeting: Friday, 10th Jun 2022
“The advance calendar for the next half-year of MPC meetings will be shared at the time of the June 2022 MPC meeting,” SBP said