On Tuesday, Pakistan’s central bank increased its benchmark policy rate by 100 basis points to a new record high of 21% as part of its efforts to curb the nation’s increasing inflation. This move was consistent with market forecasts.
“MPC (monetary policy committee) regards today’s decision, coupled with the cumulative monetary tightening so far, as adequate to anchor inflation expectations around its medium-term objective,” the State Bank of Pakistan (SBP) stated on its official Twitter account.
In March 2023, the inflation rate reached a record high of 35.4%. Experts predict that it will reach its high in April or May 2023, when it will be between 37% and 40%.
The market believes that the central bank raised the rate in response to the IMF’s advice to restart the $6.5 billion loan programme.
The central bank also stated in its monetary policy statement that, “amidst low foreign exchange reserves, ongoing debt repayments, and recent tightening in global financial conditions,” external account vulnerabilities persist despite a significant decrease in the current account deficit in recent months.
The committee identified three significant changes since the March MPC meeting that have had an impact on the macroeconomic outlook. First, largely as a result of significant import restraint, the current account deficit has shrunk significantly, more so than initially projected. “Yet, with foreign exchange reserves staying at low levels, the overall balance of payments position continues to be under stress.”
Second, there has been a lot of work made in finishing the ninth review under the IMF’s Extended Fund Facility (EFF) programme.
Finally, the world’s liquidity and financial conditions have become much tighter as a result of recent pressures in the global banking system. The inability of developing market economies like Pakistan to access global capital markets has increased as a result of this.
The MPC emphasizes that today’s decision, combined with earlier cumulative monetary tightening, will help attain the medium-term inflation objective over the next eight quarters and that it believes the current monetary policy stance is appropriate. The committee did caution that there are dangers to this evaluation due to the global financial conditions and the domestic political climate.
The current account deficit in February 2023 was only $74 million, and the total deficit from July to February of FY23 is currently $3.9 billion, or roughly 68% less than the same period last year.