MPC hikes policy rate by 300 basis points

Central bank's interest rate touches 20% mark for first time in 27 years

ISLAMABAD: In a move that was much anticipated by the State Bank, the policy rate has been raised by 300 basis points. From now on the effective policy rate in the country stands at 20%. 

In a session that was preponed by 14 days, the MPC made the historic decision, this is the first time since the 22nd October 1996 that the MPC has touched the 20% mark. The current hike is also a record for aggression in the policy rate hike. The last time the MPC hiked the policy rate by at least 300 basis points was also in October 1996.

As per reports, it was the IMF that wanted Pakistan to have a policy rate that was comparable to the country’s core inflation. 

As per the monetary policy statement, recent fiscal adjustments and exchange rate depreciation had led to a significant deterioration in the near-term inflation outlook, with the national CPI inflation surging to 31.5 % in February 2023. The MPC emphasised that anchoring inflation expectations was critical and warranted a strong policy response. Ironically, the exchange rate also fell, rather significantly, even while the meeting was taking place.

The statement points out that vulnerabilities continue to persist on the external side, including pressure on FX reserves and the exchange rate. However, as per the committee, the recent fiscal measures are expected to help contain the otherwise widening fiscal and primary deficits.

The monetary policy statement also goes on to say that the committee envisaged fiscal consolidation which is critical for economic stability and will complement the ongoing monetary tightening in bringing down inflation over the medium-term. However, with Ramadan around the corner and multiple elections approaching, fiscal consolidation might just be hard to achieve. 

The MPC also assessed the impact of further monetary tightening on financial stability and the near-term growth outlook, acknowledging the trade-off between inflation and growth. The committee reiterated from previous statements that the short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched.

“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.”, said the MPC statement.

With the real interest rate now in positive territory on a forward-looking basis, the MPC hoped to steer inflation to the medium-term target of 5 – 7 percent by the end of FY25.

The next MPC meeting is set to take place on April 4, 2023, instead of its original date which was April 27, 2023. While responding to a question about the anticipated hike in the next meeting, the head of equity research, Fahad Rauf told Profit that there was too much uncertainty to make a claim as of now. The decision will become clearer by looking at how the inflation moves.

 

Shahnawaz Ali
Shahnawaz Ali
The author is a Business and Finance journalist at Profit and can be reached via email at [email protected] and via twitter @shahnawaz_ali1

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