SBP announces monetary policy, increases interest rate by 3% to 20%

KARACHI (92 News) - The State Bank of Pakistan's (SBP) Monetary Policy Committee (MPC) on Thursday decided to increase the policy rate by 300 basis points (3%) to 20 %.

During the last meeting in January, the committee had highlighted near-term risks to the inflation outlook from external and fiscal adjustments. Most of these risks have materialized and are partially reflected in the inflation outturns for February. The national CPI inflation has surged to 31.5 percent y/y, while core inflation rose to 17.1 percent in urban and 21.5 percent in rural basket in February 2023.

In today’s meeting, the MPC noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near-term inflation outlook and a further upward drift in inflation expectations, as reflected in the latest wave of surveys. It expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace.

The average inflation this year is now expected in the range of 27-29 percent against the November 2022 projection of 21-23 percent. In this context, the MPC emphasized that anchoring inflation expectations is critical and warrants a strong policy response.

However, recent fiscal measures – including an increase in GST and excise duties, reduction in subsidies, adjustments in energy prices, and the austerity drive – are expected to help contain the otherwise widening fiscal and primary deficits. As highlighted in earlier statements, the envisaged fiscal consolidation is critical for economic stability and will complement the ongoing monetary tightening in bringing down inflation over the medium-term.

The committee emphasized that any significant fiscal slippages will undermine monetary policy effectiveness in the context of achieving the price stability objective. The committee will hold its next meeting on April 4.