Friday, December 2, 2022

Monetary Policy: SBP Raises interest Rate to 13.75%

On Monday, the State Bank of Pakistan (SBP) increased the monetary policy rate by 150 basis points, bringing it to 13.75 percent for the next six weeks. This was done to maintain a healthy balance between economic growth and inflation.

“The MPC came to the conclusion that the policy rate should be raised by 150 basis points to 13.75 percent. According to a statement released by the central bank, “this move, coupled with much needed fiscal consolidation, should assist slow demand to a more sustainable pace while keeping inflation expectations anchored and minimizing risks to external stability.”

The MPV noted that after the economy shrank by 0.9 percent in FY20 as a result of Covid, it has rebounded much more strongly than anticipated, growing by 5.7 percent in the previous year and accelerating to 5.97 percent this year, according to provisional estimates. This is despite the fact that the economy contracted by 0.9 percent in FY20 as a result of Covid.

“The MPC’s baseline outlook assumes continuing engagement with the IMF, as well as the reversal of fuel and electricity subsidies during FY23, in addition to the normalization of the petroleum development levy (PDL) and the GST taxes on fuel,” Given these presumptions, it is likely that headline inflation will grow for a period of time, and it is possible that it will continue to be high during the following fiscal year. Following that, it is anticipated that it will drop to the goal range of 5-7 percent by the end of FY24. This is driven by fiscal consolidation, moderating growth, normalization of global commodity prices, and favorable base effects, as stated in the statement.

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At the same time, the Monetary Policy Committee (MPC) stressed how urgently a robust and fair fiscal consolidation is needed to complement the current steps of monetary tightening. The pressures that are currently being exerted on inflation, market rates, and the external account could be relieved as a result of this.

It is important to point out that the State Bank of Pakistan (SBP) established a monetary policy rate of 12.25 percent back in April of this year. This fact is relevant to the discussion at hand.

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