Tuesday, August 9, 2022

SBP increases interest rate by 150 basis points to 13.75%

SBP increases interest rate by 150 basis points to 13.75%
May 23, 2022 Web Desk

KARACHI (92 News) - The State Bank of Pakistan (SBP) has decided to increase the policy rate by 150 basis points to 13.75 percent.

The decision was made during a meeting of the SBP's Monetary Policy Committee (MPC) on Monday. "This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability," it opined.

The MPC said 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," it added.

"On the external front, notwithstanding some encouraging moderation in the current account deficit during April, the Rupee depreciated further due both to domestic uncertainty as well as recent strengthening of the US dollar in international markets following tightening by the Federal Reserve.

"In addition to today’s policy rate increase, the interest rates on EFS and LTFF loans are also being raised. Going forward, to strengthen monetary policy transmission, these rates will be linked to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports. At the same time, the MPC emphasized the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account."

Headline inflation rose from 12.7 percent (y/y) in March to 13.4 percent in April, driven by perishable food items and core inflation. The rise in core inflation reflects strong domestic demand and second-round effects of supply shocks. At the same time, measures of long-term inflation expectations have also ticked up.

As electricity and fuel subsidies are reversed, inflation is likely to rise temporarily and may remain elevated through FY23 before declining sharply during FY24. This baseline outlook is subject to risks from the path of global commodity prices and the domestic fiscal policy stance. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.