To keep inflation and economic growth in check, the Monetary Policy Committee (MPC) Monday increased the benchmark policy rate by 150 basis points to 13.75 percent for the next six weeks.
Interest rates have risen to their highest level since the end of 2011 when they were at 14 percent. The MPC has been convened for the first time under acting governor Dr Murtaza Syed to make the decision about the key policy rate. As a result of a rise in the key policy rate, the economic managers will be able to contain rising inflation, reduce imports, and stabilize the sinking rupee versus the dollar. It will eventually stabilize the economy.
Inflation hit a two-year high of 13.4 percent in April, according to the Bureau of Labor Statistics. If the government decides to reduce subsidies on petroleum products and electricity, it is expected that inflation will climb by at least 15%.
However, Finance Minister Miftah Ismail stated that the government would not pass the hike in international energy costs on to end consumers in order to avert a fresh wave of inflation in the country.
A statement from the SBP stated that this ‘effective step’ was necessary to stabilize inflation expectations and ensure external stability.
“The Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 13.75 percent. This action, together with the much-needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability,” reads the statement issued by the central bank on Monday.
According to the monetary policy statement, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. “Since the last MPC meeting, provisional estimates suggest that growth in FY22 has been much stronger than expected.
Meanwhile, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand, and lingering policy uncertainty has compounded pressures on the exchange rate.
Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new Covid wave in China. As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook,” SBP said.
A decrease in imports and rise in remittances lowered Pakistan’s current account deficit to $623 million in April, less than half the average for the current fiscal year, according to the statement.
The announcement came on the same day that the local currency fell against the US dollar in the interbank market for the 13th straight session, to 200.93, down 0.39 percent. The announcement of the MPC’s decision was eagerly anticipated because of the country’s current economic conditions. An emergency meeting of the MPC on April 7 resolved to raise the policy rate by 250 basis points, bringing it to 12.25 percent at that time.
Hinting at the upcoming Monetary Policy Committee (MPC) meeting on July 7, the SBP stated, “Going ahead, in order to increase monetary policy transmission, these rates will be linked to the policy rate and will adjust automatically, while remaining below the policy rate to encourage exports.”