March 3, 2023
ISLAMABAD – The State Bank of Pakistan (SBP) announced on Thursday that it had increased the interest rate by 300 basis points (bps) to 20 per cent — the highest level since October 1996 — citing rising inflation.
The announcement came after a meeting of the bank’s Monetary Policy Committee (MPC).
The central bank said the decision reflected the “deterioration in inflation outlook” and its expectation amid recent external and fiscal adjustments.
“MPC believes this outlook warrants a strong policy response to anchor inflation expectations around the medium-term target of 5-7pc,” it stated.
The SBP noted that the reduction in the current account deficit (CAD) was important but required concerted efforts to improve the external situation, emphasising that any significant fiscal slippage would undermine monetary policy effectiveness in the context of achieving price stability.
According to the SBP press release, the MPC had highlighted in its meeting in January the near-term risks to the inflation outlook from external and fiscal adjustments.
“Most of these risks have materialised and are partially reflected in the inflation outturns for February,” it said. “The national CPI inflation has surged to 31.5pc year-on-year, while core inflation rose to 17.1pc in urban and 21.5pc in a rural basket in February 2023.”
The press release stated that the recent fiscal adjustments and exchange rate depreciation had led to a significant deterioration in the near-term inflation outlook and a further upward drift in inflation expectations.
“The Committee expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace,” the central bank said.
The SBP also said that “vulnerabilities continued to persist despite a substantial reduction in the current account deficit (CAD)”.
It highlighted that scheduled debt repayments and a decline in financial inflows amid rising global interest rates and domestic uncertainties continued to pressurise the forex reserves and the exchange rate.
“In this regard, the conclusion of the ongoing 9th review under the Internatio Thursday.
According to the bank, the total liquid foreign reserves stood at $9.27 billion.
Last week, Finance Minister Ishaq Dar announced that the China Development Bank (CDB) had approved a $700 million credit facility for Pakistan.
The minister had said that the central bank was expected to receive the money this week, which would help shore up the country’s dwindling foreign exchange reserves.
Pakistan, which is a $350bn economy, is facing economic turmoil, with a balance of payment crisis and only enough foreign exchange reserves to cover three weeks of imports.