Pak increases interest rate by 300 bps to 20% amid rising inflation

The State Bank of Pakistan has increased the interest rate by a massive 300 basis points (bps) taking it to a record-high level of 20 per cent, in accordance with the conditions set by the IMF

The State Bank of Pakistan has increased the interest rate by a massive 300 basis points (bps) taking it to a record-high level of 20 per cent, in accordance with the conditions set by the International Monetary Fund, The News International reported.

The Monetary Policy Committee (MPC) which was constituted as a statutory committee under the State Bank of Pakistan Act has taken the decision to raise the policy rate to its highest level since October 1996 in an attempt to "anchor inflation expectations as it is critical and warrants a strong policy response," as per the news report.

Pakistan's Central Bank increased the interest rate by 300 bps taking the total increase to 1,050 bs since January 2022 to counter rising inflation. The Monetary Policy Committee's meeting was due to take place on March 16, The News International reported. However, the MPC decided to "prepone" it to tackle the emerging risks to the economy including a record inflation number, which reached at a nearly 50-year high of 31.5 per cent in February.

SBP in a tweet on March 2 wrote, "The Monetary Policy Committee decided to raise the policy rate by 300 basis points to 20 percent in its meeting today." In another tweet, SBP wrote, "This decision reflects deterioration in inflation outlook & its expectations amid recent external and fiscal adjustments. MPC believes this outlook warrants a strong policy response to anchor inflation expectations around the medium-term target of 5-7 per cent."

It further stated, "MPC noted that reduction in CAD is important but requires concerted efforts to improve the external situation. It emphasized that any significant fiscal slippage would undermine monetary policy effectiveness in the context of achieving the price stability objective."

The national inflation calculated on the basis of the consumer price index (CPI) has increased and reached 31.5 per cent on an annual basis, while core inflation jumped to 17.1 per cent in urban and 21.5 per cent in a rural basket in February 2023, as per The News International report.

According to MPC, the recent fiscal adjustments and exchange rate depreciation have led to a significant decline in the near-term inflation outlook and a further upward drift in inflation expectations, as shown in the latest wave of surveys.

The committee expects inflation to increase further in the next few months as the effect of these adjustments unfolds before it starts to fall, albeit at a gradual pace, as per The News International report. The committee also changed its forecast for the average inflation this year which is now expected to increase by 27-29 per cent. Earlier in November, the committee had said that the average inflation is expected to increase by 21-23 per cent.