SBP raises interest rate by 150 basis points, takes it to 8.75%

State Bank of Pakistan (SBP) Monetary Policy Committee has decided to raise the policy rate by 150 basis points to 8.75 percent, reported 24NewsHD TV channel. 

1/3 The MPC decided to raise the policy rate by 150 basis points to 8.75%. This reflected their view that since the last meeting, risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve. https://t.co/qsvs9Z9mh3

— SBP (@StateBank_Pak) November 19, 2021

In a statement, SBP said, “This reflected the MPC’s view that since the last meeting, risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve.”

“The heightened risks related to inflation and balance of payments stem from both global and domestic factors. Across the world, price pressures from Covid-induced disruptions to supply chains and higher energy prices are proving to be larger and longer-lasting than previously anticipated,” the apex bank said. 

The statement further reads, “In response, central banks have generally begun to tighten monetary policy to keep inflation expectations anchored. In Pakistan too, high import prices have contributed to higher-than-expected CPI, SPI, and core inflation outturns.” 

SBP said that at the same time, there are also emerging signs of demand-side pressures on inflation and inflation expectations of businesses have risen on account of further upside risks from domestic administered prices.

SBP further said that with respect to the balance of payments, the current account deficits in September and October have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand.

Accordingly, the MPC was of the view that there is now a need to proceed faster to normalize monetary policy to counter inflationary pressures and preserve stability with growth. Today’s rate increase is a material move in this direction. Looking ahead, the MPC re-iterated that the end goal of mildly positive real interest rates remains unchanged and, given today’s move, expects to take measured steps to that end. 

In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

SBP further said," The economic recovery underway since the start of FY-21 continues, and domestic demand―including automobile sales, POL rose sharply." 

It further reads, “High international commodity prices and strong domestic activity kept the current account deficit elevated.”

“During the first quarter current account deficit widens by $3.4 billion. Current Account (CA) for FY-22 is expected to modestly exceed the previous forecast of 2-3%t of GDP. Rupee has depreciated by a further 3.4 percent since the last MPC meeting,” SBP further added.

“Overall fiscal deficit improved to 0.8% of GDP in Q1-FY22 from 1%. Real money supply growth has accelerated in recent months to above trend levels. With the economic recovery on a sound footing, there is a need to pare back this growth as part of the broader move toward normalizing monetary conditions,” the statement reads. 

The MPC noted that the recent increase in banks’ cash reserve requirements would help in this regard and inflationary pressures have increased considerably since the last MPC meeting.

Inflation rising from 8.4 % in August to 9%t in September and further to 9.2% in the October. Mainly driven by higher energy costs and a rise in core inflation.

Core inflation has also picked up in the last two months, rising to 6.7% (y/y) in both urban and rural. Up due to house rents, cloth and garments, medicines, footwear, and other components.

In addition, inflation expectations of households remain elevated and those of businesses have risen sharply average inflation forecast of 7-9 percent in FY-22.