Monetary policy: SBP hikes interest rates to 22pc in ‘emergency meeting’

ISLAMABAD: The Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP), in an ‘emergency meeting’, raised its key interest rate by 100 basis points (bps) to 22 percent, days after it announced to keep policy rate unchanged, ARY News reported on Monday.

Taking to Twitter, the SBP’s MPC explained that the potential upside risks to the inflation outlook had increased from its last meeting on June 12.

“MPC views that these risks are mainly coming from the implementation of new measures in the fiscal and external sectors, which are important in the context of completion of the ongoing IMF (International Monetary Fund) programme.

“MPC noted that today’s action is necessary to keep the real interest rate firmly in positive territory on a forward-looking basis that would help in bringing down inflation towards the medium-term target of five to seven percent by the end of fiscal year 25,” the central bank stated.

1/3 MPC of #SBP convened an emergency meeting today, where it noted that potential upside risks to the inflation outlook have increased from the last meeting, and accordingly decided to raise the policy rate by 100bps to 22%.https://t.co/unuS6xmJHz#SBPMonetaryPolicy pic.twitter.com/FWenKLqdkt

— SBP (@StateBank_Pak) June 26, 2023

In a press release issued today, the central bank stated that “two important domestic developments” since its June 12 meeting had slightly deteriorated the inflation outlook and could potentially increase pressure on the already stressed external account.

“First, there are certain upward revisions in taxes, duties and petroleum development levy rate in FY24 budget as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritisation of imports,” the press release reads.

It added that while the MPC viewed these measures as “necessary” in the context of the ongoing IMF programme’s completion, they had nonetheless increased the upside risks to the inflation outlook.

The committee said it was of the view that additional tax measures are likely to contribute to inflation both directly and indirectly, while the relaxation in imports may exert pressures in the foreign exchange market.

The statement added the latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices.

Giving details regarding the hike in policy rate, the committee said it viewed the action as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis.

“This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5 – 7 percent by the end of FY25, barring any unforeseen developments,” it added.

“The MPC views that today’s decision, along with the expected completion of the ongoing IMF programme and the government adhering to the target of generating a primary surplus in FY24, would help in addressing external sector vulnerabilities and reduce economic uncertainty.

“The committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term,” the press release concluded.

Earlier on June 12, the SBP’s Monetary Policy Committee (MPC) decided to keep the interest rate unchanged at 21 percent for the next two months.

The Monetary Policy Committee had met in April last, wherein it had jacked up the key policy rate by 100 basis points to a record high of 21% to control inflation. Since January 2022, the SBP has raised rates by a total of 1,150bps.

According to a press release issued by the central bank, higher inflation outturns for April and May were broadly as anticipated, noting sequential ease in inflation expectations of both consumers and businesses from their recent peaks.

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