The State Bank of Pakistan (SBP) looks set to raise its key policy rate at its review today (Monday), as it attempts to tackle surging inflation which hit 24.5% in December 2022.
The fact that Pakistan is dealing with economic unrest, a decline in reserves, and a depreciating currency makes it clear that the central bank is getting ready to raise the benchmark interest rate at its first Monetary Policy Committee meeting of 2023. However, it is unclear how much the increase will rise until SBP Governor Jameel Ahmad makes the official announcement.
In order to address growing inflation, the central bank increased the benchmark interest rate by 100 basis points (bps) to 16% in November of last year, which is the highest level since 1999. This rise brings the total increase since September 2021 to 900 bps.
According to a Topline Research survey, the market expects an increase in the interest rate of 100 to 200 basis points. The majority of participants (74%) anticipate a 100–200bps increase; of these, 37% predict a 100bps increase, 18% predict a 150bps increase, and 19% predict a 200bps increase.
The remainder of the participants foresees a rate increase of more than 200bps in 2% of cases, a 50bps increase in 5%, no change in 18% of cases, and a rate drop in only 2% of cases.
The issues on the external front keep getting worse as SBP’s foreign exchange reserves fell to $4.56 billion as a result of massive loan repayments and a halt in incoming funds.
“We think that the policy rate will increase by 100bps however if the inflation rate does not fall and external issues persist, further rate hikes cannot be ruled out,” said Topline Research.
The urban core inflation (non-food and non-energy) was 14.7% in December 2022 compared to 14.6% in November since the latest monetary policy statement on November 25, 2022.
Meanwhile, the rural core inflation increased to 19% last month as compared to 18.5% in November. The increase in core inflation will also be a major concern for the central bank.
The SBP’s decision is being closely watched because Pakistan is trying to persuade the International Monetary Fund (IMF) to conclude the ninth review of the eagerly awaited bailout package, which has been on hold since September 2022, and because the country agreed to some tough economic policy adjustments to tempt the Washington-based lender.
