KARACHI: The State Bank of Pakistan (SBP) on Monday increased the monetary policy rate by 100 basis points to 17 percent in order to check ‘inflationary pressures’, ARY News reported.
According to a press release issued by the Central Bank, the Monetary Policy Committee (MPC) decided to increase the benchmark interest rate by 100 basis points to 17 percent.
“The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer than-anticipated period,” the press release stated.
The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.
Since the last meeting, the MPC noted three important economic developments, First, inflation continues to remain elevated, with core inflation has been on a rising trend for the past 10 months. Second, near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit and ongoing debt repayments have led to a continuous drawdown in official reserves.
“Third, the global economic and financial conditions broadly remain uncertain in the near-to-short term, leading to mixed implications for the domestic economy,” it added.
It further stated, “On balance, the committee reiterated its November 2022 assessment that the short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched,”
The MPC also emphasised the engagements with the multilateral and bilateral partners to overcome domestic uncertainty and to address the near-term external sector challenges.
Current Account Deficit
According to SBP’s statement, the current account deficit narrowed
by around 60 percent to $3.7 billion in H1-FY23. “This substantial reduction was due to a sharp contraction in imports, reflecting the impact of policy tightening and administrative measures,” it added.
The statement added the contraction in imports was broad-based, with all major groups, except food and petroleum groups, recording declines. Petroleum imports increased by 17.4 percent (BOP data), resulting in their share rising to 34.1 percent in H1-FY23 from 23.7 percent in H1-FY22.
Read More: Monetary Policy: SBP raises policy rate by 100bps to 16 percent
In this backdrop, the MPC noted that effective implementation of energy conservation measures and appropriate pricing of petroleum products is critical for much-needed reduction in energy imports. The benefit of an 18.2 percent fall in imports was partially offset by declines in export receipts and remittances.
Fiscal deficit
The SBP, in its statement, noted that the fiscal deficit widened to 1.5 percent of GDP in the first four months of FY23 from 0.9 percent in the same period last year, while the primary surplus fell to 0.2 percent of GDP, as compared to 0.3 percent last year.
“The FBR taxes grew by 17.0 percent in H1-FY23, slower than the growth envisaged in the budget,” it stated, adding the expectation of further slowdown in economic activity and reduction in imports in H2-FY23 poses downside risks to maintaining growth momentum in tax collection.
The MPC noted that the current fiscal stance is inconsistent with monetary tightening. Thus, given the evolving macroeconomic challenges, it is important for the fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth.
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