SBP increases interest rate by 2.5% to 12.25%

KARACHI (92 News) - The State Bank of Pakistan (SBP) has increased the interest rate by 2.5 percent to 12.25 percent.

The decision was made during an urgent meeting of the Monetary Policy Committee (MPC) on Thursday.

The MPC was of the view that this action would help to safeguard external and price stability. It also noted that SBP is in the process of taking further actions to reduce pressures on inflation and the current account, namely an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements.

It stated that these items are mostly finished goods including luxury items and exclude raw materials.

The committee noted that the significant uncertainty around the outlook for international commodity prices and global financial conditions, which had been exacerbated by the Russia-Ukraine conflict. Given the unfolding situation, the MPC had highlighted that it 'was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability.'

Since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen. Externally, futures markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions.

In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments pertaining to settlement of an arbitration award related to a mining project. Some of this decline in reserves is expected to be reversed as official creditors renew their loans.

As a result of these developments, average inflation forecasts have been revised upwards to slightly above 11 percent in FY22 before moderating in FY23. The current account deficit is still expected to be around 4 percent of GDP in FY22. While the non-oil current account balance has continued to improve, the overall current account remains dependent on global commodity prices.

The committee noted that the above developments necessitated a strong and proactive policy response. Importantly, the it highlighted that Pakistan’s external financing needs in FY22 are fully met from identified sources. Looking ahead, the MPC noted that today’s decisive actions, together with a reduction in domestic political uncertainty and prudent fiscal policies, should help ensure that Pakistan’s robust economic recovery from Covid-19 remains sustainable.