Pakistan raises rates by 100bps to record 21%

Pakistan’s central bank on Tuesday raised its benchmark interest rate to a record 21% to contain rising inflation and in an effort to unlock the International Monetary Fund’s $6.5 billion loan programme.

The State Bank of Pakistan’s monetary policy committee (MPC) increased the target rate by 100 basis points bps) from 20%, according to a statement by State Bank of Pakistan — the central bank.

The move was seen by 6 of 37 economists in a Bloomberg survey, with three predicting a hold and the rest expecting a hike of over 150 basis points.

The key rate is at the highest since central bank data going back to 1956.

1/4 Monetary Policy Committee decided to increase policy rate by 100bps to 21% in its meeting today.https://t.co/JeUhdtDFrq pic.twitter.com/6avIFg4S6c

— SBP (@StateBank_Pak) April 4, 2023

Record inflation

The MPC noted that inflation in March 2023 rose further to 35.4 per cent, and is expected to remain high in the near term. However, there are early indications of inflation expectations plateauing, albeit at an elevated level.

2/4 Headline inflation rose further in Mar23 as was noted in last MPS. MPC noted that there are initial signs of plateauing of inflation expectations, albeit at elevated levels.

— SBP (@StateBank_Pak) April 4, 2023

“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 committee further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate,” the statement said.

2/4 Headline inflation rose further in Mar23 as was noted in last MPS. MPC noted that there are initial signs of plateauing of inflation expectations, albeit at elevated levels.

— SBP (@StateBank_Pak) April 4, 2023

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

3/4 MPC views today’s decision, along with the cumulative monetary tightening so far, as adequate to anchor inflation expectations around its medium-term target – barring any unanticipated shock.

— SBP (@StateBank_Pak) April 4, 2023

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 IMF’s extended fund facility (EFF) programme.

Interest Rates in Pakistan is 20% which is the highest ever interest rate since 1996 and tops the list of the Asian countries. Yet, in today’s SBP Monetary Policy Committee Meeting we expect a 200 bps increase in the interest rate to tame the skyrocketing inflation. pic.twitter.com/ba65bdFJeF

— ZLK Securities (@zlk_securities) April 4, 2023

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.

CPI, Nominal Inflation & Real Interest Rate
Real interest rates touching negative 10.64% after inflation rates soars to 35.4% and interest rate reaches at 21%.

#Pakistan #economy #SBP #interestrates #inflation pic.twitter.com/LAYfvpZFof

— Capital Stake (@CapitalStake) April 4, 2023

Inflation outlook
The MPC also viewed the current monetary policy stance as appropriate to bring inflation down to the medium-term target range of 5-7% over the next six to eight quarters.

“As a result, inflation is still expected to fall within the previously announced range of 7-9% for 2020-21 and trend toward the 5-7% target range over the medium-term,” the statement said, adding that in 2022-23 inflation is expected to decline toward the medium-term target range of 5-7% more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act.

4/4 MPC also noted that despite sharp reduction in current account deficit, external account vulnerabilities persist, amidst low FX reserves, ongoing debt repayments and recent tightening in global financial conditions.

— SBP (@StateBank_Pak) April 4, 2023

“The MPC considers the current monetary policy stance appropriate, and stresses that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next 8 quarters,” the statement said.