SBP raises interest rate to 13.75%

KARACHI: In a bid to tackle soaring inflation, the State Bank of Pakistan (SBP) approved a 150-basis point (bps) increase on Monday, taking the base interest rate up to 13.75% from 12.25%. 

The decision came as Finance Minister Miftah Ismail traveled to Doha to hold talks with the International Monetary Fund (IMF) about the renewal of the $6 billion loan program. 

Although this move was widely expected, policymakers went beyond the predicted level of 100 bps. It marked the biggest rate hike in about 11 years, when the policy rate was recorded at 14% in May 2011. Since September 2021, the SBP has cumulatively increased the rate by 675 basis points.

According to a monetary policy statement issued by the central bank, “This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.”

This was the first meeting of the Monetary Policy Committee (MPC) under the acting governor, Dr. Murtaza Syed. The next session is scheduled to take place on July 7, where the MPC will continue to “carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth”. 

Global inflationary pressures have intensified sharply, after Russia’s unprovoked onslaught in Ukraine and China’s new COVID-19 lockdown policies, which threaten to hit supply chains again.

Domestically, the surging inflation has been exacerbated by dwindling foreign exchange reserves, rising fiscal deficit, the recent energy subsidy package, and the rupee further tumbling against the dollar, to close at over PKR 200/USD. 

However, the MCP assumed that continued talks with the IMF, combined with the reversal of fuel and electricity subsidies, is likely to cause this inflation surge only temporarily, throughout the next fiscal year. It is predicted to fall by the end of FY24. Until then, this “effective action” was necessary to maintain economic stability.