As anticipated by market experts, the State Bank of Pakistan (SBP) raised its benchmark policy rate by 100 basis points, reaching a new record high of 21% on Tuesday. This decision aims to curb the escalating inflation in the country.
The SBP announced on its official Twitter account that the Monetary Policy Committee (MPC) considers the recent decision, combined with the previous monetary tightening, sufficient to stabilize inflation expectations around its medium-term goal unless an unexpected shock occurs.
In March 2023, Pakistan’s inflation reached a 60-year high at 35.4%. Analysts predict it will peak between 37% and 40% in April or May 2023.
Market observers believe the SBP raised the rate based on the International Monetary Fund’s (IMF) advice to resume its $6.5 billion loan program.
In its monetary policy statement, the central bank also highlighted that despite a significant reduction in the current account deficit in recent months, external account vulnerabilities remain due to low foreign exchange reserves, ongoing debt repayments, and recent global financial tightening.
The MPC identified three key developments since its last meeting in March that impact the macroeconomic outlook. Firstly, the current account deficit has narrowed considerably due to significant import containment. However, the overall balance of payments remains under stress, with foreign exchange reserves at low levels.
Secondly, substantial progress has been made toward completing the ninth review under the IMF’s Extended Fund Facility (EFF) program.
Lastly, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions, making it more challenging for emerging market economies like Pakistan to access international capital markets.
The MPC believes the current monetary policy stance is suitable and emphasizes that the decision and previous monetary tightening measures will help achieve the medium-term inflation target over the next eight quarters. Nevertheless, the committee recognizes that global financial conditions and domestic political uncertainties pose risks to this assessment.
In February 2023, the current account deficit was only $74 million. The cumulative deficit stood at $3.9 billion from July to February in FY23, approximately 68% lower than last year.
