The State Bank of Pakistan (SBP) has decided to hike the policy rate by 100 basis points to 21 percent, according to a press release issued on Tuesday.
After a meeting of the bank’s Monetary Policy Committee, the statement was made. (MPC).
“The MPC observed that inflation increased to 35.4 percent in March 2023 and is expected to stay high in the near future. Although still at a high level, there are early signs that inflation expectations are plateauing, according to a news release from the central bank.
The MPC noticed today’s decision as “an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability,” according to the press release.
The committee added that while economic activity “continues to moderate,” Pakistan’s financial sector “remains broadly resilient.”
The committee had identified three crucial events that had an impact on the macroeconomic outlook, according to the press release.
“First, the current account imbalance has shrunk significantly, more so than initially expected, largely as a result of significant import containment. However, with foreign currency reserves still at low levels, the overall balance of payments situation is still under pressure, according to the press release.
“Second, significant progress has been made towards completion of the ninth review under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme.
“Third, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions. These have added to the difficulties of the emerging market economies like Pakistan to access international capital markets,” the statement said.
The MPC considered the current monetary policy stance “appropriate” as a result, according to the central bank, which also emphasised that the decision, along with earlier monetary tightening, would help achieve the medium-term inflation goal over the next eight quarters.
The statement said, “The committee observed that uncertainties related to the domestic political climate as well as the global financial conditions, pose risks to this assessment.
The MPC also observed that the current account deficit in February was only $74 million, and that the cumulative deficit for Jul-Feb FY23 is now $3.9 billion, or roughly 68 percent less than it was during the same time last year.
According to the press release, “This primarily reflects the contraction in imports, which continues to outweigh the combined decline in remittances and exports.” It also noted that worker remittances had slightly increased month over month in February and that the trend was expected to continue.
“However, despite the lower current account deficit, higher loan repayments relative to disbursements are keeping the foreign exchange reserves under pressure. Thus, the committee reemphasiaed that the early conclusion of the ninth review under the IMF programme is critical to rebuilding the FX reserve buffers.”