Pakistan central bank
raises key interest rate
by 1.5% to 13.75% as
inflation deteriorates

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KARACHI: Pakistan’s central bank on Monday raised the key policy rate by 150 basis points to 13.75 percent as the inflation outlook deteriorated due to home-grown and international factors, the State Bank of Pakistan said. 
The central bank announcement comes at a time when the country’s national currency hit an all time low at Rs200.93 against the United States Dollar on Monday, amid continued demand for import payments and as inflation increased by 13.4 percent in the month of April 2022. 

The central bank said provisional estimates suggest growth in the current fiscal year had been much stronger than expected but a recent fuel subsidy had compounded pressure on the exchange rate. 

In a statement, the SBP’s Monetary Policy Committee (MPC) said the move, along with fiscal consolidation, would help moderate demand to a sustainable pace.

The State Bank of Pakistan

The central bank had announced an increase of 250bps in the policy rate last month.

“Since last meeting, estimates suggest growth in FY22 has been much stronger than expected. Meanwhile external pressures remain elevated and inflation outlook deteriorated due to home-grown and international factors,” it said in a series of tweets.

The economy could benefit from some cooling with the output gap now positive, the SBP said.

The central bank’s MPC urged “strong and equitable fiscal consolidation” in addition to the monetary tightening, saying it would ease pressures on inflation, market rates and the external account.

Along with the increase in the policy rate, the central bank also raised the interest rates on EFS (export finance scheme) and LTFF (long-term financing facility) loans, adding that they would be linked to the policy rate and would adjust automatically.

Economic growth was expected to moderate to 3.5-4.5pc in FY23, it said.

The SBP said the country’s expansionary fiscal stance this year, exacerbated by the energy subsidy package announced during the previous PTI government, had fueled demand while pressure on the exchange rate increased because of lingering policy uncertainty.

In addition, inflation was rising globally amid the Russia-Ukraine war and supply disruptions caused due to the latest coronavirus wave in China.

‘Headline inflation likely to increase temporarily’

The economy had rebounded from the pandemic more strongly than anticipated, the SBP said, while inflation had risen to a two-year high in April and has remained in double-digits for the last six months.

Meanwhile, the rupee depreciated both because of domestic factors and the dollar’s strengthening in international markets.

“The MPC’s baseline outlook assumes continued engagement with the IMF (International Monetary Fund), as well as reversal of fuel and electricity subsidies together with normalisation of the petroleum development levy (PDL) and GST taxes on fuel during FY23. Under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year.

“Thereafter, it is expected to fall to the 5-7pc target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalisation of global commodity prices, and beneficial base effects.”

The SBP also noted that headline inflation rose from 12.7pc year-on-year in March to 13.4pc in April due to perishable food items and core inflation.

It projected that inflation was ” likely to rise temporarily and may remain elevated through FY23 before declining sharply during FY24″ as electricity and fuel subsidies are reversed.

“This baseline outlook is subject to risks from the path of global commodity prices and the domestic fiscal policy stance,” it said.