The SBP raises the policy rate to 15%. Since September 2021, the central bank has increased interest rates by 800 basis points.

KARACHI: The State Bank of Pakistan (SBP) declared its monetary policy on Thursday, raising its benchmark interest rate by 125 basis points to 15% for the next four weeks.

The rate increase comes as the coalition administration works hard to reactivate the much-anticipated International Monetary Fund (IMF) to restart a $6 billion loan package that has been frozen since early April.

Since September 2021, the central bank has raised the interest rate by 800 basis points in order to manage inflation and reduce the current account deficit.

Today's meeting presided over by Acting Governor Dr. Murtaza Syed, decided that interest rates on export finance scheme (EFS) and long-term financing facility (LTFF) loans will now be linked to the policy rate to strengthen monetary policy transmission while continuing to incentivize exports by currently offering a 500 basis point discount relative to the policy rate.

According to a statement made by the central bank, this joint measure maintains the monetary tightening that has been in place since September, "with the goal of guaranteeing the economy's gentle landing despite an unusually tough and unpredictable global environment."

"It should assist calm economic activity, prevent inflation expectations from de-anchoring, and offer support to the rupee in the aftermath of multi-year high inflation and record imports," the statement said.

Three positive developments

The central bank stated that "three promising developments" had occurred since the last meeting of the Monetary Policy Committee.

  1. The unsustainable energy subsidy package was overturned, and an FY23 budget focused on substantial fiscal consolidation was enacted, paving the path for the completion of the ongoing IMF program review.
  2. A $2.3 billion commercial loan from China aided in bolstering foreign exchange reserves, which had been declining since January owing to current account constraints, external debt repayments, and a lack of new foreign inflows.
  3. Economic activity was solid, with the momentum of the previous two years' near-6% growth continuing into FY23.

The MPC, however, acknowledged that some negative events eclipsed the aforementioned positive news.

According to the report, global inflation is reaching multi-decade highs in most countries, and central banks are responding strongly, putting downward pressure on most emerging market currencies. Domestically, when energy subsidies were phased out, both headline and core inflation jumped sharply in June, reaching a 14-year high.

'Pakistan is experiencing a significant negative income shock.'

"Against this tough environment, the MPC emphasized the significance of robust, prompt, and credible policy steps to limit domestic demand, prevent inflationary pressures from accumulating, and decrease threats to external stability," the statement said.

According to the members of the MPC, "Pakistan, like the rest of the globe, is facing a huge negative income shock from rising inflation and required but unpleasant increases in utility costs and taxes."

The central bank considers that if dramatic macroeconomic changes are not made, there is a significant danger of much worse results, jeopardizing price stability, financial stability, and growth.

The MPC hinted at more monetary policy tightening in its next meeting on August 22, noting that runaway inflation and depletion of foreign currency reserves might need rapid and forceful tightening moves later, which would be "more disruptive for economic activity and employment."

"Adjustment is tough but required in Pakistan, as it is anywhere else." However, in the interest of social stability, the burden of this adjustment must be shared equitably across the population, by ensuring that the relatively well-off absorb the majority of the increase in utility prices and taxes, while the more vulnerable receive well-targeted and adequate assistance," it stated.

"The MPC will continue to closely watch events impacting medium-term prospects for inflation, financial stability, and growth, and will take appropriate measures to protect them," the central bank stated.