15% policy rate - knocking on the door

The Karachi Interbank offered rate, simply known as KIBOR, hit a 13 year high of 14.1% on Tuesday. While it might seem so, the KIBOR is not trying to mimic petrol prices by being at a high, instead this is telling of a larger pattern that has been present in the money markets over a period of time.

The markets are pricing in for a policy rate hike. At this point, you’re probably rolling your eyes because we’ve been saying that for the past few months. However, while it has been true for the past few months, yet things aren’t really changing.

The buildup

During COVID 19, in order to support the economy, the SBP decided to increase money supply by bringing down interest rates. This was to provide liquidity to businesses and the markets in order to keep them afloat during uncertain times. Although the move was inflationary, it was probably important at that time. Besides, Central Banks hadn’t really prepared for a virus that changes life as we know it.