KARACHI : March 2, 2023: To give a big opportunity to the banks to make more and more profit at the cost of national economic soverignity and show absolute surrender to the International Monetary Fund (IMF), the State Bank of Pakistan (SBP) on Thursday increased interest rate by 300 basis points to take interest rate to all time high in Pakistan’s 75 history.
A statement issued by the SBP on Thursday said its meeting held on 2nd March 2023, the Monetary Policy Committee (MPC) decided to increase the
policy rate by 300 basis points to 20 percent. During the last meeting in January, the Committee had
highlighted near-term risks to the inflation outlook from external and fiscal adjustments. Most of these risks
have materialized and are partially reflected in the inflation outturns for February. The national CPI inflation
has surged to 31.5 percent y/y, while core inflation rose to 17.1 percent in urban and 21.5 percent in rural
basket in February 2023.
In today’s meeting, the MPC noted that the recent fiscal adjustments and exchange rate depreciation have
led to a significant deterioration in the near term inflation outlook and a further upward drift in inflation
expectations, as reflected in the latest wave of surveys. The Committee expects inflation to rise further in the
next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace.
The average inflation this year is now expected in the range of 27 – 29 percent against the November 2022
projection of 21 – 23 percent. In this context, the MPC emphasized that anchoring inflation expectations is
critical and warrants a strong policy response.
On the external side, the MPC noted that despite a substantial reduction in the current account deficit
(CAD), vulnerabilities continue to persist. In January 2023, the CAD fell to $242 million, the lowest level
since March 2021. Cumulatively, the CAD – at $3.8 billion in Jul-Jan FY23 – is down 67 percent compared tothe same period last year. Notwithstanding this improvement, scheduled debt repayments and a decline infinancial inflows amid rising global interest rates and domestic uncertainties, continue to exert pressure on FX
reserves and the exchange rate. The MPC noted that FX reserves remain low and concerted efforts are
needed to improve the external position. In this regard, conclusion of the ongoing 9th review under the IMF’s
EFF will help address near-term external sector challenges. Furthermore, the MPC stressed on the urgent
need for energy conservation measures to alleviate pressure on the external account and meet the import
requirements of other sectors.
Recent fiscal measures – including an increase in GST and excise duties, reduction in subsidies, adjustments in energy prices, and the austerity drive – are expected to help contain the otherwise widening
fiscal and primary deficits. As highlighted in earlier statements, the envisaged fiscal consolidation is critical for economic stability and will complement the ongoing monetary tightening in bringing down inflation over the
medium-term. The Committee emphasized that any significant fiscal slippages will undermine monetary
policy effectiveness in the context of achieving the price stability objective.
5. The MPC also assessed the impact of further monetary tightening on financial stability and the near-term growth outlook. The Committee views that the risks to financial stability remain contained, given that financial institutions are broadly well capitalized. On growth, however, there exists a trade-off. The MPC,
nonetheless, reiterated its earlier view that the short-term costs of bringing down inflation are lower than the
long-term costs of allowing it to become entrenched. Barring unexpected future shocks, the MPC noted that today’s decision has pushed the real interest rate in positive territory on a forward-looking basis. This will
help anchor inflation expectations and steer inflation to the medium-term target of 5 – 7 percent by endFY25.
6. The Committee also decided to meet on April 4,2023.
