In line with market expectations, Pakistan’s central bank hiked its benchmark policy rate by 100 basis points to a new record high of 21% on Tuesday as the bank took measures to anchor rising inflation in the country.
State Bank of Pakistan (SBP) said on its official Twitter handle “MPC (monetary policy committee) 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.” The inflation reading hit a six-decade high at 35.4% in March 2023. It is projected to peak in the range of 37% to 40% in April or May 2023, experts said.
The market is of the view that the central bank increased the rate on IMF’s recommendation to resume its $6.5 billion loan programme. The central bank also noted in its monetary policy statement that despite a sharp reduction in the current account deficit in recent months, external account vulnerabilities persist, “amidst low foreign exchange reserves, ongoing debt repayments and recent tightening in global financial conditions.”
Since the last MPC meeting in March, the committee 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 toward the completion of the ninth review under the IMF’s EFF (extended fund facility) programme.
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.”
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. “However, the committee noted that uncertainties attached with the global financial conditions as well as the domestic political situation, pose risks to this assessment.” In February 2023, the current account saw a deficit of only $74 million and the cumulative deficit now stands at $3.9 billion in Jul-Feb FY23, about 68 percent lower than the same period last year.