SBP Raises Policy Rate to Record High

Hi everyone! I hope you are all doing well. Welcome back to another blog. This article will discuss the topic in detail “SBP Raises Policy Rate to Record High”. The State Bank of Pakistan (SBP) made a surprising and unprecedented move. They announced a sudden 1 percent hike in the interest rate, raising it to a staggering 22 percent. The decision was made during an emergency meeting of the Monetary Policy Committee (MPC). The SBP acted swiftly, demonstrating their seriousness in addressing the current economic circumstances.

The Monetary Policy Committee (MPC) met on June 12 and deemed the current monetary policy stance appropriate for achieving price stability. This assessment assumes no unforeseen domestic or external shocks. The MPC emphasized the need to effectively address domestic uncertainty and mitigate vulnerabilities from external factors.

In the most recent statement released today, the central bank announced that the committee had taken note of two significant domestic developments that have had a slightly deteriorating effect on the inflation outlook. These developments possess the potential to exert additional pressure on the already burdened external account.

In the recently approved FY24 budget by the National Assembly on June 25, certain upward revisions have been made in taxes, duties, and the PDL rate. Simultaneously, the State Bank of Pakistan (SBP) withdrew its general guidance for commercial banks regarding the prioritization of imports on June 23.

According to the statement released, the Monetary Policy Committee (MPC) considers these measures necessary to complete the ongoing IMF program. However, they also acknowledge that these actions have elevated the upside risks associated with the inflation outlook.

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The committee further points out that the additional tax measures are likely to, directly and indirectly, contribute to inflation. While the relaxation in import policies may exert pressures on the foreign exchange market. Consequently, these factors might result in a higher-than-anticipated exchange rate pass-through to domestic prices, as stated in the official announcement.

The Monetary Policy Committee (MPC) emphasizes the necessity of the current action to ensure a positive real interest rate. This approach strengthens inflation expectations and responds to the recent moderation in inflation. The MPC believes that combining this measure with the completion of the ongoing IMF program. And the government’s commitment to a primary surplus in FY24 will address external vulnerabilities and reduce economic uncertainty. Also, the goal is to achieve 5-7% inflation by the end of FY25, barring unforeseen events.


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