Saturday, December 7, 2024
Saturday, December 7, 2024
HomeBusinessSBP raises interest rate by 100bps to 21pc

SBP raises interest rate by 100bps to 21pc

The State Bank of Pakistan (SBP) on Tuesday released a press statement announcing an increase in the policy rate by 100 basis points to 21%. This decision was made after a meeting of the bank’s Monetary Policy Committee (MPC).

The press release stated that inflation had risen to 35.4% in March 2023 and was expected to remain high in the near future. However, the MPC noted early signs of inflation expectations stabilizing at an elevated level. The committee views this decision as a crucial step in anchoring inflation expectations around the medium-term target, which is necessary for achieving price stability.

The press release further noted that Pakistan’s financial sector remains broadly resilient, while economic activity is continuing to moderate. The MPC observed three key developments that have implications for the macroeconomic outlook. Firstly, the current account deficit has narrowed considerably due to import containment.

Secondly, significant progress has been made towards the completion of the ninth review under the IMF’s Extended Fund Facility (EFF) program. Thirdly, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions, making it difficult for emerging market economies like Pakistan to access international capital markets.

The central bank considers the current monetary policy stance to be appropriate, given the uncertainties attached to the global financial conditions and domestic political situation, which pose risks to the assessment. The MPC believes that the decision, along with previous monetary tightening, will help achieve the medium-term inflation target over the next eight quarters.

The release said that the current account deficit saw a shortfall of $74 million in February, and the deficit stands at $3.9 billion in Jul-Feb FY23.

Despite the lower current account deficit, higher loan repayments relative to disbursements are keeping the foreign exchange reserves under pressure, and the committee emphasized the need for the early conclusion of the ninth review under the IMF program to rebuild FX reserve buffers.

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