Islamabad, 3 March 2023 (GNP): According to the report, the State Bank of Pakistan (SBP) has raised the policy rate by 300 basis points, making it the highest since October 1996.
The country raised rates by 20% as part of its effort to obtain a $1 billion loan from the International Monetary Fund (IMF).
The State Bank of Pakistan defended its action by claiming that it was a reflection of the “deterioration in inflation forecast” and its expectations in the context of current external and fiscal reforms.
The central bank’s Monetary Policy Committee (MPC) stated that it thought this scenario called for a coherent policy response to keep inflation expectations anchored around the medium-term objective of 5-7%.
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The central bank also stated that it was crucial but necessary to reduce the current account deficit (CAD) but required efforts to improve the external situation.
It went on to say that any considerable budgetary slip would hinder monetary policy efficiency in terms of accomplishing the price stability goal.
On February 28, the SBP announced that it has summoned a meeting of its Monetary Policy Committee for today, March 2 (two weeks ahead of schedule), when it was anticipated to raise the main policy rate.
IMF situation
Khurram Shehbaz, CEO of Alpha Beta Core, commented on the move and said that the policy rate was intended to satisfy the International Monetary Fund’s (IMF) request.
He added that the increase to 20 percent last occurred in 1996.
Raza Jafri, the head of Equity at Intermarket Securities, stated that other actions made to finish the IMF program aligned with the SBP’s decision.
“The SBP’s decision to increase the policy rate by 300bps to 20pc reflects the much-changed inflation outlook where the core consumer price index (CPI) is expected to be about 20pc in the next few months,” he told
Expected rise
Pakistan is taking important steps to get International Monetary Fund (IMF) funding, such as raising taxes, eliminating all subsidies, and placing artificial exchange rate restraints. According to media sources, the agency anticipates a hike in the policy rate even if the administration anticipates reaching an agreement with the IMF soon.
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Market participants in a recent treasury bill auction had earlier projected that the policy rate, which had previously been set at 17 percent, would rise by at least 200 basis points. The rates the government established in the auction to raise the funds are the foundation for the anticipated hike.
On February 22, the government held an auction in which it raised Rs258 billion. The three-month, six-month, and 12-month term cut-off rates increased by 195 basis points, 206 basis points, and 184 basis points, respectively, from the previous auction.
Since January 2022, the SBP has increased rates by 725 bps; the most recent increase was 100 bps in January. The bank had stated at the time that the action was intended to combat rising inflation.
But immediately after that, January’s annual inflation rate registered at 27.5 percent, a five-decade high.
It is anticipated that the CPI would increase by close to 30% in February as a result of recent increases in petrol prices and the general sales tax that have not yet been taken into account.
