The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) raised on Tuesday the key policy rate by 100 basis points, taking it to 21%.

“At its meeting today, the MPC decided to increase the policy rate by 100 basis points to 21%,” it said in a statement. “The MPC noted that inflation in March 2023 rose further to 35.4%, and is expected to remain high in the near term.

“However, there are early indications of inflation expectations plateauing, albeit at an elevated level. The MPC views today’s decision as an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability. The MPC further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate.”

The committee said it noted three important developments having implications for the macroeconomic outlook.

“First, the current account deficit has narrowed considerably, more than previously anticipated, mainly on the back of sizable import containment. Nonetheless, the overall balance of payments position continues to remain under stress, with foreign exchange reserves still at low levels.

“Second, significant progress has been made towards completion of the 9th review under the International Monetary Fund’s (IMF) EFF program.

“Third, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions. These have added to the difficulties of the emerging market economies like Pakistan to access international capital markets.”

It added that it considers the current monetary policy stance appropriate, and stressed that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next 8 quarters.

It, however, noted that uncertainties attached with the global financial conditions as well as the domestic political situation, pose risks to this assessment.

Reactions

Abdullah Umer, a market analyst, told Business Recorder that the MPC would need to move quickly if inflation remains elevated in coming months.

Samiullah Tariq, Head of Research at Pak Kuwait Investment Company, said it seems like the policy rate has hit its peak.

“The current account is expected to be in surplus in March, and would maintain a downward trajectory in the coming months. It seems like the rate has hit its peak,” Tariq told Business Recorder.

Background

Analysts had anticipated the central bank to raise its key interest rate by 200 basis points in today’s announcement as it looks to tame inflation.

Since the previous MPC emergency meeting held in March 2023, in which the committee raised the key interest rate by 300 basis points to 20% on higher inflation outlook, a number of key economic developments on the domestic front have taken place.

The Consumer Price Index (CPI)-based inflation clocked in at 35.4% in March on a year-on-year basis, the highest since 1965.

On a month-on-month basis, it increased to 3.7%, data released by Pakistan Bureau of Statistics (PBS) said.

However, the Sensitive Price Indicator-based inflation for the week ended March 30, 2023 was recorded at 249.75 points against 250.66 points registered in the previous week, a decrease of 0.36%. A major decline was observed in the prices of food items.

Pakistan’s current account deficit declined by over 68% during the first eight months of this fiscal year (FY23) mainly due to a lower import bill.

The current account recorded a deficit of $3.961 billion during July-February of FY23 compared to $12.077 billion in the same period of last fiscal year (FY22), depicting a decline of $9.216 billion.

Economists say the federal government’s measures to curtail rising imports have reduced some pressure on the country’s current account. However, concerns remained that the declining trend is unsustainable.

Meanwhile, despite recent gains, foreign exchange reserves held by the central bank are languishing at $4.244 billion as of March 24, 2023, latest data showed.

Last month, Pakistan received the second disbursement of $500 million from the Industrial and Commercial Bank of China (ICBC). Cumulatively, Pakistan has received $1.7 billion from Chinese institutions with another $300 million expected.

Last week, Finance Minister Ishaq Dar also confirmed that China has rolled over for a year its $2 billion loan to Pakistan—denying the media reports that Pakistan was still awaiting this rollover.

However, the critical IMF programme remains stalled despite tough measures taken by the government to appease the international lender for the disbursement of its $1.1 billion tranche.