The increase is expected to keep the inflation in check and maintain external stability. The State Bank of Pakistan expects to “alleviate pressures on inflation, market rates and the external account” through these decisions.
The Monetary Policy Committee of the SBP met on 23rd May, 2022 to take policy decisions in order to tackle the economic uncertainty. The key decision of the MPC was to raise the policy rate by 150 bps to 13.75 percent. According to the Monetary Policy Statement by the SBP, both internal and external factors contributed to this decision. Internally, domestic uncertainty, expansionary monetary policy and petroleum and energy subsidy, while externally the Russia-Ukraine war and the latest wave of Covid-19 in China influenced the decision.
The latest hike has taken the policy interest rate to its highest in more than two years. This is the second increase in the policy rate in the last two months, earlier on 7th April, SBP had increased it by 250 bps to 12.25%. Such harsh decisions points to the worsening economic situation in the greater purview of the looming political uncertainty.
Besides increasing policy rate, SBP has also elevated rates of EFS (export finance scheme) and LTFF (long-term financing facility) that are kept lower than policy rate to encourage exports.
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In its statement, MPC has pointed out that the economic stability of the country greatly relies on resumption of the IMF bailout program along with the rolling over of debts by the bilateral official creditors and narrowing of the current account deficit. The incumbent government aims to reduce the current account deficit by curbing imports, while economic experts have suggested ineffectiveness of such measures.
The statement of MPC also highlighted the unfortunate primary deficit of 0.7 percent of GDP recorded in the first three quarters of the fiscal year as compared to the 0.8% surplus in the coinciding time period of last fiscal year.
SBP has indicated a further rise in inflation when the petroleum and energy subsidies are lifted.