SBP hikes intertest rate by 150bps to 13.75pc

Karachi: The State Bank of Pakistan (SBP) enhanced the benchmark policy rate by 150 basis points to 13.75 per cent on Monday.

The intertest rate ahs been hiked to "keep inflation expectations anchored and contain risks to external stability".

In a statement issued by the central bank, the SBP's Monetary Policy Committee (MPC) said the move, along with fiscal consolidation, would help moderate demand to a sustainable pace.

The central bank had announced an increase of 250bps in the policy rate last month.

1/3 At today’s meeting, MPC decided to raise policy rate by 150bps to 13.75%. This action, together with much needed fiscal consolidation, should help moderate demand to more sustainable pace while keeping inflation expectations anchored & containing risks to external stability.

— SBP (@StateBank_Pak) May 23, 2022

"Since last meeting, estimates suggest growth in FY22 has been much stronger than expected. Meanwhile external pressures remain elevated and inflation outlook deteriorated due to home-grown and international factors," it said in a series of tweets.

The economy could benefit from some cooling with the output gap now positive, the SBP said.

The MPC emphasized the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account. 

According to the monetary policy statement, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. 

"Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty has compounded pressures on the exchange rate," the committee noted.

Moreover, globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new COVID wave in China. 

Consequently, the SBP noted that almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.

"The MPC’s baseline outlook assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies together with normalisation of the petroleum development levy (PDL) and GST taxes on fuel during FY23," the statement read. 

The SBP highlighted that under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year. 

"Thereafter, it is expected to fall to the 5-7% target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalisation of global commodity prices, and beneficial base effects. 

"Considering the balance of risks around this baseline, the MPC felt it was important to take effective action to anchor inflation expectations and maintain external stability," it added.

The MPC during the meeting emphasised the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account.