The State Bank of Pakistan (SBP), which is struggling with rising inflation and uncertainties surrounding the stalled International Monetary Fund (IMF) loan programme, increased its benchmark interest rate by 150 basis points to 8.75 percent on Friday.
The MPC (Monetary Policy Committee) believed that in order to combat inflationary pressures and maintain stability with growth, it was necessary to move more quickly toward normalising monetary policy.
“Looking forward, the MPC emphasised that the ultimate objective of modestly positive real interest rates remains unchanged, and given today’s action, expects to take cautious steps to that end,” it continued.Although many observers had anticipated the central bank would raise rates, the magnitude of the increase exceeded most forecasts.
The SBP also stated that since the last MPC meeting, inflationary pressures had significantly strengthened, with headline inflation jumping from 8.4 percent year-over-year in August to 9 percent in September and then to 9.2 percent in October. It said that increased energy prices and an increase in core inflation were the key causes of this increase.
Therefore, it stated that “going ahead, global commodity prices and potential future increases in administered energy costs represent upside risks to the average inflation prediction of 7-9pc in FY22.”The SBP’s warning comes as the nation’s sizable middle and low classes continue to be negatively impacted by high inflation as the cost of necessities like food and fuel rises in advance of the colder winter months.
The SBP reported that after the most recent MPC meeting in September, the rupee has fallen by 3.4 percent.The Federal Reserve’s tapering has been anticipated earlier, which has caused the US dollar to gain value versus the majority of emerging market currencies since May, it was stated. “Nevertheless, the rupee’s value has declined significantly since May. Pressures on the rupee should lessen when other adjustment mechanisms, like as interest rates and fiscal policy, return to normal.”
Additionally, “persistently high” global commodity prices and robust local demand maintained the current account deficit high in the first quarter of FY22 at $3.4 billion, according to the SBP.