MPC hikes policy rate to 17%

The State Bank of Pakistan (SBP) in a much anticipated MPC meeting has raised the policy rate by 100 basis points. The effective policy (target) rate now stands at 17%, which is its highest level in over 25 years.

With this latest development, Pakistan now stands as the country with the 13th highest interest rate in the world, with only countries of the likes of Iran, Sudan, Sierra Leone, Ukraine, Argentina and Zimbabwe ahead of it. The decision was prompted by higher than expected inflation rates and inflation expectation. 

Deciphering the Monetary Policy Statement

The monetary policy statement stated that inflationary pressures have been on the rising trend, despite a tight monetary policy. The inflationary pressure is stated as “broad-based” and “persistent”, and it is deemed critical to anchor this pressure  or long-term sustainable growth. The statement added that “short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched”.

The MPC statement noted that core inflation had still been on a rising trend. This means that non-food, non-energy inflation, that has little to no relation to exogenous shocks, and should have otherwise stayed within the target could still not be tamed at the 16% mark. The statement also took note of the fact that the inflation outlook was also on the rise causing the risk of more inflation. 

The committee also stated that, “the global economic and financial conditions broadly remain uncertain in the near-to-short term”, and an expected economic slowdown and fall in the global demand could mean even worse circumstances for exporters.

The MPC statement, on its outlook of the real sector notes that the “downside risks on the SBP’s growth outlook for this year have increased” owing to shutting down of various production cuts and supply chain constraints faced by the industries. This means that the low growth rate target set by the state bank might end up being lower than anticipated. The MPC has noted moderate economic activity in response to policy tightening, and “exogenous shocks” like the floods. 

The MPC statement, in its assessment of the external sector, also states that the “effective implementation of energy conservation measures and appropriate pricing of petroleum products is critical for much-needed reduction in energy imports”. The statement regards the 60% reduction in CAD over December, a result of tight policy and another factor that the statement refers to as, “administrative measures”. 

However, “the MPC (also) views that the completion of the pending 9th review under the IMF’s EFF (to be) critical for reducing uncertainty and unlocking multilateral and bilateral inflows.)

The MPC also states that “the current fiscal stance is inconsistent with monetary tightening”. The statement points out that the FBR tax collection grew slower than the budget target.

With a medium term inflation target of 5-7% for December 2024, the MPC aims to control the inflation expectations. A feat that is increasingly difficult to achieve where the December 2022 CPI inflation was recorded at over 24%.