The State Bank of Pakistan (SBP) increased the policy interest rate by 100 basis points to 9.75 per cent and revised targets for inflation, current account deficit and growth rate and changed perception about the rising import bill.
While announcing the decision, the SBP explained that the policy rate was raised “to counter the inflationary pressure and ensure that growth remains stable”. “The MPC (Monetary Policy Committee) expects monetary policy settings to remain broadly unchanged in the near term,” the SBP said, adding that the end goal of mildly positive real interest rate on a forward-looking basis was now close to being achieved.The SBP said that since the last MPC meeting despite a moderation in consumer loans, the overall credit growth has remained supportive of growth. Meanwhile, across all tenors secondary market yields benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.
The SBP said the momentum in inflation had continued since the last meeting, as reflected in a significant increase in both headline and core inflation in November. “Due to recent higher than expected outturns, SBP expects inflation to average 9-11 per cent this fiscal year,” it said, adding that the pickup in inflation had been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors.With that in mind, whether or not the current rate hike will make a dent in inflation is a point to ponder. The SBP, however, appears to be ignoring the facts by claiming that “the end goal of mildly positive” real interest rate is “close to being achieved” in the near future. This statement ignores the fact that many of the contributors to domestic inflation, such as international oil and food prices, are expected to continue rising.
It is also odd that the bank admits international prices are a major cause of inflation and that the current account deficit is rising sharply, it still feels the emphasis on monetary policy to manage the impending crisis is “appropriate”. The fact is that the deficit cannot be corrected in a vacuum, unless stabilising the rupee or encouraging investment have been abandoned as options.