SBP holds policy rate at 22%

The State Bank of Pakistan, in line with wide market consensus, maintained the key policy rate at 22%, opting for a wait-and-see approach as it assesses the effectiveness of earlier monetary policy tightening in reducing inflation.

In a statement, the Monetary Policy Committee (MPC) said that it maintained the key policy rate after taking into account the impact of the recent hike in gas prices on inflation in November, which was relatively higher than the MPC’s earlier expectation.

The MPC, which maintained the key rate for the fourth straight meeting, mentioned that the November gas price hike could affect the inflation outlook.

"The decision does take into account the impact of the recent hike in gas prices ... the Committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments," the statement said.

The MPC had last raised the key rate to 22% in June this year during an off-cycle meeting as part of a reforms programme amid the authorities being desperate to secure a $3 billion bailout from the International Monetary Fund (IMF) to avoid a sovereign default.

The $350 billion economy has been witnessing high inflation, with the consumer price index (CPI) soaring past 20% since June 2022, and jumping to a historic high of 38% in May this year — with experts not expecting it to go down any time soon.

Although the IMF and the SBP expect inflation to drop at the end of the fiscal year in June 2024, inflation clocked in at 29.2% last month after the caretaker government hiked energy prices to meet the IMF’s reforms.

"Barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24," the bank’s statement said.

Despite an economic slowdown, investors believe that the interest rate will not jump further and they expect the IMF programme to be completed. This has boosted the stock market, which has reached historic highs.

Pakistan Stock Exchange’s benchmark index KSE100 crossed the psychological barrier of 66,000 points to trade at an all-time high, gaining 4,532 points or 7.3% in the week ending Dec. 8, the highest ever weekly return in terms of points.