In surprise move, State Bank hikes interest rate to 16pc

KARACHI: The State Bank of Pakistan (SBP) Friday raised its benchmark interest rate by 100 basis points (bps) to 16 percent — the highest ever since 1999 — in a bid to curb the soaring inflation.

In its last two meetings in October and September, the central bank had left the rate unchanged.

The SBP has increased the policy rate by a cumulative of 625 bps in 2022, including the latest hike. This time, the SBP has surprised the market participants and analysts by raising rates as the economy battles to recover from devastating floods.

“This decision reflects the MPC’s [Monetary Policy Committee] view that inflationary pressures have proven to be stronger and more persistent than expected,” the central bank said in a statement.

“It is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” it added.

The SBP cited risks of high inflation becoming persistent due to a rise in cost-push inflation as justification for increasing the interest rates at the highest rate in 23 years, despite the fact that the economy has slowed down.

The global and domestic supply shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth, it said.

The SBP has reiterated its prior gross domestic product projection of about 2 percent for the current fiscal year after incorporating post-disaster needs assessments of the floods. It also reaffirmed the current account deficit forecast of about 3 percent of GDP.

The central bank said it now sees inflation reaching 21-23 percent in FY2023, well above the 18-20 percent previously predicted, and driven particularly by soaring food prices and core inflation. However, it still expects the inflation to fall toward the upper range of the 5-7 percent medium-term target by the end of FY24, supported by prudent macroeconomic policies. With the consumer price index rising 26.6 percent year-on-year in October, Pakistan has been grappling with escalating inflation.

High food prices pushed weekly inflation up 0.48 percent week-on-week and 30.16 percent year-on-year during the seven-day period that ended November 24, according to the Pakistan Bureau of Statistics (PBS) data.

The sensitive price indicator (SPI) increased for the sixth consecutive week mainly on account of increase in prices of eggs (8.45 percent), bananas (5.87 percent), chicken (4.03 percent), onions (2.35 percent), tea prepared (2.02 percent), sugar (1.31 percent), firewood (1.76 percent) and cooked daal (1.07 percent).

On the other hand, a major decrease was observed in the prices of pulse gram (1.26 percent), tomatoes (1.08 percent), pulse masoor (1.07 percent), vegetable ghee 2.5kg (0.59 percent), wheat flour (0.40 percent), LPG (0.39 percent), cooking oil 5 litre (0.32 percent) and pulse moong and mash (0.17 percent) each.

The SBP said external account challenges become persistent since the MPC’s last meeting in October, despite moderation in the current account deficit and fresh funding from the Asian Development Bank. The payment for Pakistan’s International Sukuk, which matures on December 5, 2022, will be made on December 2, 2022, according to Jameel Ahmad, Governor SBP.

The repayment amount is around $1.08 billion which includes both, principal as well as interest, said a local brokerage house, Arif Habib Limited, who cited the governor at the analysts’ briefing held after the MPC meeting.

The governor further stated that funding against this repayment had already been arranged.

Commenting on the expected reserve position by FY2023-end, the governor said that it will remain largely dependent on the planned inflows, outflows, and rollovers; however, will be much higher than the current level.

During November, $1.8 billion was repaid which was mostly against commercial loans, according to the SBP’s governor.

Commenting on the backlog of imports, the governor said 7,000 pending cases had been cleared so far, amounting to $2.8 billion.

Addressing the external funding concerns, the SBP informed that Pakistan was expecting external flows from multilateral (such as World Bank, Asian Development Bank, Asian Infrastructure Investment Bank and others), bilateral and other sources of which $500 million from Asian Infrastructure Investment Bank is likely to be received earlier next week, on November 29.

Talking about the IMF programme, the SBP said talks between the finance ministry and IMF were in progress.

Meanwhile, Finance Minister Ishaq Dar Friday reaffirmed the country’s commitment to meeting all of its financial obligations on time.

“Bloomberg pitches Pakistan’s one-year probability of default at a low of 10 percent as opposed to a highly dubious number of 93 percent circulated by an unscrupulous local political leader a few days ago,” Dar said at the official Twitter handle.

“Pakistan will InshaAllah continue to honor its all financial commitments on time,” he added. On November 21, Pakistan’s five-year CDS — insurance-like contracts that protect against default and restructuring — skyrocketed to 123 percent.