Strong inflationary pressure pushes Pakistan to raise key interest rate to 16 percent

A customer sees the price of rice at a shop in Karachi, Pakistan, on June 10, 2022. (AFP/File)

• The central bank raised the policy rate by 100 basis points while blaming inflation on global and local supply shocks
• The bank projected the average inflation during the current fiscal year to remain over 21 percent due to food prices

KARACHI: Pakistan’s central bank decided to jack up key policy rate by 100 basis points to 16 percent on Friday, citing inflationary pressure in the economy which, it said, had not toned down yet.
The State Bank of Pakistan (SBP) previously increased the interest rate by 1.25 percent to 15 percent in July this year. So far, it has raised the key rate by 625 basis points, including the latest increase, since the outset of the year.
“At today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 16 percent,” said a statement released by the central bank. “The decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.”
The SBP said it had taken the decision to ensure that elevated inflation should not get entrenched and begin to risk financial stability, adding that it wanted to pave the way for higher growth on a more sustainable basis.
The bank said inflation was increasingly driven by persistent global and domestic supply shocks that were also raising costs amid the ongoing economic slowdown.
“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth,” it added.
The bank continued the rise in cost-push inflation could not be overlooked and necessitated a monetary policy response.
The MPC noted the short-term costs of bringing inflation down were lower than the long-term costs of allowing it to fester.
It also called for curbing food inflation through administrative measures to resolve any supply-chain bottlenecks.
The country’s inflation rate has hovered around historically high levels in Pakistan in recent months and was recorded at 26.6 percent in October. The central bank now expects the average inflation to go up to 21-23 percent during the current fiscal year (FY23) due to higher food prices and core inflation.
Pakistan has also witnessed an economic slowdown in the wake of the recent floods that have damaged huge infrastructure and agriculture output.
“After incorporating Post-Disaster Needs Assessment of the floods and latest developments, the FY23 projections for growth of around 2 percent and a current account deficit of around 3 percent of GDP shared in the last monetary policy statement are re-affirmed,” the SBP added.
It maintained that higher imports of cotton and lower exports of rice and textiles in the aftermath of the floods should be broadly offset by a continued moderation in the overall imports due to the economic slowdown and softer global commodity prices.
The central bank acknowledged that the recent climate catastrophe could make it challenging to achieve the aggressive fiscal consolidation budgeted for the year, though it noted that it was important to minimize slippages by meeting additional spending needs through expenditure reallocation and foreign grants.
The bank also emphasized the need to maintain fiscal discipline to complement monetary tightening, saying the two things could help prevent an entrenchment of inflation and lower external vulnerabilities.