Pakistan raises policy rate by 125bps to 15%

The central bank of Pakistan has increased the interest rate by 125 basis points (bps) to 15% in a bid to check the spiraling inflation.
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The "most important" objective behind the move was to control inflation, said the acting governor of the State Bank of Pakistan Dr Murtaza Syed at a press conference after the monetary policy committee (MPC) met to decide on the policy rate, reports Dawn.

He attributed the rise in inflation to global reasons, such as the Russia-Ukraine war, and domestic developments, including a "very high economic growth".

Syed said that while a high economic growth rate was usually a good development, Pakistan's economy was structured in a way that it would start facing problems if the rate was six per cent for two years in a row.

Inflation had risen because of fiscal expansion, he added.

"The environment is very complex and uncertain. We have seen this kind of inflation globally after 50-60 years."

The acting governor, however, expressed the hope that the country would get past the phase of high inflation in the same way that it had been successful in combatting the coronavirus pandemic.

Syed said that inflation would remain between 18 to 20pc in the current fiscal year, however, the SBP would try to make sure that it did not rise beyond 20pc.

If the SBP had not raised the benchmark policy rate, it could have led to a worse situation — hyperinflation and more pressure on the currency, he said.

The central bank acting chief said economic growth was expected to come in at 3 to 4pc in the current fiscal year, which would reduce the risk of a further rise in inflation.

"The inflation number will remain high but we will try that it does not increase. We will try to control month-on-month [inflation] but the year-on-year [inflation] will unfortunately remain between 18 to 20pc."

He emphasised the need to control food prices. "While the monetary policy cannot control this, the agricultural output can be increased and bottlenecks in supply distribution can be addressed."

Meanwhile, SBP Deputy Governor Sima Kamal said the Monetary Policy Committee had decided that the Export Finance Scheme (EFS) and Long-Term Finance Facility (LTFF) rates would be 5pc less compared to the interest rate.

"We want to keep supporting the exporter … this is a very important step," she said.

The central bank earlier raised the benchmark interest rate by 150 bps to 13.75pc in May.

Pakistan is wrestling with economic turmoil, a fall in reserves and a weakening currency. Data on Friday showed consumer prices in June soared to 21.3 per cent from a year earlier, largely on account of a 90pc spike in fuel prices since the end of May after the government scrapped costly fuel subsidies.

Most economists and market watchers believed a hike was inevitable, given persistently high global energy prices, the abrupt ending of fuel subsidies as well as the need to control demand after SBP said in its last policy statement the economy had rebounded much more strongly than anticipated.

With Pakistan expecting a restart of the much-awaited bailout package from the International Monetary Fund after the country agreed on some tough economic policy adjustments to promote stability, the SBP's decision was being closely watched.