Unexpected level of current account deficit, inflation led to hike in policy rate: Dr Reza Baqir

An unexpected level of current account deficit and high inflation resulted in the interest rate hike of 150 basis points, said State Bank of Pakistan (SBP) Governor Dr Reza Baqir.

His statement came after the SBP’s Monetary Policy Committee (MPC) announced on Friday that it is raising the key interest rate by 150 basis points, which took it to 8.75% — the highest level since April 2020, around the time the pandemic began.

Monetary policy: Experts say rate hike higher than expected

However, the hike, according to some experts, was higher than market expectations. The MPC also preponed its announcement by a week, raising further alarm over the interest rate. It also said that it is increasing the number of MPC meetings from six to eight times a year.

SBP increases number of MPC meetings, releases schedule till June 2022

The MPC’s view was that since the last meeting, in which the policy rate was increased by 25 basis points to 7.25%, risks related to inflation and the balance of payments have increased while outlook for growth has continued to improve.

Talking to a private TV channel after the announcement, Dr Baqir said that the SBP forecast of economic growth for the current year is at 5%.

“Last year it was 4%, and the year before that it was negative 0.5%, which means that our growth is moving on an upward trajectory,” said Dr Baqir.

SBP hikes rate by 150bps to 8.75pc on inflation, BoP

The ex-IMF official said Pakistan’s inflation rate in the past three months stood at 8.4%, 9%, and 9.2%.

“The measure taken in the policy meeting would help reduce inflation concerns.”

Pakistan’s economy has been facing pressure on the external account and inflation fronts as policymakers look to make efforts to balance faster growth and a widening current account deficit.

The current account deficit widened to $1.66 billion in October 2021, a massive increase when compared with $1.13 billion in September 2021 due to high energy prices and an uptick in services imports. For the four months of the ongoing fiscal year, the current account continued to deteriorate and posted over $5-billion deficit against $1.313 billion surplus in the corresponding period last fiscal year (FY21).

4MFY22 YoY: Current account posts $5bn deficit on higher import bill

The development has added to pressure on the currency, which has depreciated from around 152 in May 2021 to over 175 against the US dollar in just over six months.

Dr Baqir said that an increase in the current account deficit, uncertainty regarding Afghanistan situation and the IMF programme created pressure on the Pakistan rupee.

Pakistan's rupee falls further, closes above 175 against US dollar

“We took this (interest-rate hike) measure because of two reasons; firstly, we need to reduce the inflation rate and secondly, concerns regarding the current account deficit should be addressed by moderating demand growth,” said SBP chief.

The governor was of the view that the “real benefit would be sustainable growth”.

“We are confident that we will achieve it.”

He added that the hike would bring stability in the exchange-rate market.

Earlier, Business Recorder reported that the SBP has taken notice of the volatile exchange rate and warned banks to refrain from speculations and undue practices in the currency market or face stern action.

Banks warned against exchange rate speculations

In a high-level meeting conducted of heads of commercial banks on Thursday, reasons related to the recent freefall in the exchange rate were discussed in detail. During the meeting, the SBP warned banks to refrain from exchange rate speculations and ensure fair dollar transactions in the inter-bank market.

Meanwhile, discussing measures taken to address the increasing current account deficit, the central bank chief shared that during the pandemic, the SBP launched a Temporary Economic Refinancing Facility (TERF), under which Rs430 billion worth of loans were disbursed and close to 40% were taken by the textile sector for capacity expansion.

“We believe that as the capacity expansion comes online, it would help us in increasing our exports, which will reduce the growth of the deficit.

“Secondly, our remittances are expected to grow to over $30 billion this year.”

Commenting on the support package by Saudi Arabia, the SBP chief informed that funds will be deposited into the central bank as soon as the paperwork is completed.

Dr Baqir chairs meeting with FIA, bank presidents

Meanwhile, in a separate development, Dr Baqir chaired a meeting with Director General Federal Investigation Agency (FIA) Sanaullah Abbasi on Saturday, stated the SBP in a press release.

The meeting was held to strengthen and coordinate efforts of the SBP, banks and FIA to fight money-laundering, cyber-attacks and online frauds, added the central bank.

“The meeting was also attended by the presidents of Banks and senior officers of FIA and SBP.”