SBP jacks up monetary policy rate to 12.25%

The State Bank of Pakistan (SBP) has set the monetary policy rate at 12.25%, a statement from the central bank said Thursday.

The Monetary Policy Committee (MPC) noted in its statement the significant uncertainty around the outlook for international commodity prices and global financial conditions necessitated a strong and proactive policy response so it decided at its emergency meeting today, to raise the policy rate by 250 basis points to 12.25 percent.

This increases forward-looking real interest rates (defined as the policy rate less expected
inflation) to mildly positive territory. The MPC was of the view that this action would help to safeguard external and price stability.

The MPC also noted that SBP is in the process of taking further actions to reduce pressures on inflation and the current account, namely an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements.

These items are mostly finished goods including luxury items and exclude raw materials. The announcement of these measures is expected soon and will complement the action taken by the MPC on interest rates today.

The statement says that since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen. Externally, futures markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions.

On the domestic front, the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly. While timely demand-moderating measures and strong exports and remittances saw the February current account deficit shrink to $0.5 billion, its lowest level this fiscal year, heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic
secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting.

In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments pertaining to settlement of an arbitration award related to a mining project.