SBP raises interest rate by 125 basis points to 15 percent

Central bank’s acting governor says objective is to control inflation

State Bank of Pakistan (SBP) has increased the benchmark interest rate by a whopping 125 basis points to 15 percent, the highest in more than a decade.

During a press conference after a meeting of the Monetary Policy Committee, acting governor of SBP Dr. Murtaza Syed said that the objective of the decision was to control inflation, adding that inflation would remain high but efforts shall be made to stop it from increasing.

During the meeting, it was decided that in order to strengthen monetary policy transmission, the interest rates on export finance system (EFS) and long-term financing facility (LTFF) would be linked to the policy rate.

“Against this challenging backdrop, the MPC noted the importance of strong, timely and credible policy actions to moderate domestic demand, prevent a compounding of inflationary pressures and reduce risks to external stability,” the statement read.

The SBP acting governor said that Pakistan’s economy would start facing problems if the economic growth rate remained at six percent for two consecutive years, adding that fiscal expansion also caused inflation. He said that global factors like Russia-Ukraine war along with domestic developments have been the cause of inflation.

SBP had raised benchmark interest rate by 150 basis points to 13.75 percent in May.

In order to control inflation and narrowing current account deficit (CAD), the central bank has cumulatively increased the rate by 800 basis points since September 2021.

The coalition government’s efforts for revival of International Monetary Fund’s (IMF) program stalled since April are going on. The increase in interest rate would also help allow rupee to recover against US dollar.

According to economists, due to high international energy prices and removal of fuel subsidies, the hike in the rate was inevitable.