KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) in its emergency meeting held on Monday decided to increase the benchmark policy rate by 100 basis points (bps) to historical high of 22 percent on deteriorated inflation outlook followed by imposition of new taxes in the budget.
Cumulatively, the MPC has raised the policy rate by 825 percent during this fiscal year (FY23) to control the rising inflation. In the previous meeting held on June 12, the committee kept the policy rate unchanged at 21 percent amid subdued domestic demand and downward inflation trajectory expectation.
In the previous meeting, MPC was expecting that moderating global commodity prices and high base effect would help bring inflation down from June 2023 onwards. In this context, the MPC was of the view that maintaining the current policy stance is necessary to bring inflation down to the medium-term target range of 5-7 percent by the end of FY25.
SBP keeps key interest rate unchanged at 21%
However, the recent developments on the economic front has forced the committee to review its decision on policy rate and after two weeks of scheduled meeting, the committee in its emergent meeting decided to further tighten the monetary policy stance to curb the inflation.
After the previous meeting, the MPC viewed the monetary policy stance as appropriate to achieve the objective of price stability “barring any unexpected domestic and external shocks.” The MPC further noted that this outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”
According to a statement issued after the meeting, the Committee, however, has noted two important domestic developments since the last meeting that have slightly deteriorated inflation outlook and which could potentially increase pressure on the already stressed external account.
First, there are certain upward revisions in taxes, duties and PDL rate in FY24 budget as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritization of imports. While the MPC views these measures as necessary in the context of completion of the ongoing IMF program, they have increased the upside risks to the inflation outlook. The Committee views that additional tax measures are likely to contribute to inflation both directly and indirectly, while the relaxation in imports may exert pressures in the foreign exchange market. The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices.
With this background, the MPC convened an emergency meeting on Monday to respond to these developments. The MPC decided to raise the policy rate by 100 bps to 22 percent, effective 27th June 2023.
The MPC views this action as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis. This would help further anchor inflation expectations, which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5-7 percent by the end of FY25, barring any unforeseen developments.
The MPC views that current decision of rate increase along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty.
The Committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term. Analysts said that the current increase in policy rate one of the IMF condition for the release of EFF tranche of $1 billion to build the sliding foreign exchange reserves of the country.
Copyright Business Recorder, 2023
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