SBP raises interest rate by 100 bsp to 9.75pc to curtail inflation

KARACHI: The State Bank of Pakistan (SBP) raised its benchmark interest rate by 100 basis points for the third straight policy meeting on Tuesday, taking it to 9.75 percent and also revised its inflation forecast to 9-11 percent for the current fiscal year of 2021/22.

The tightening was widely expected by the market as inflation accelerated to 11.5 percent year-on-year in November fuelled by soaring energy and commodities prices. The central bank has raised interest rate three times since September but failed to rein in inflation, its main area of responsibility, which has kept on accelerating, denting living standard of millions in the country. “The goal of this [interest rate hike] decision is to counter inflationary pressures and ensure that growth remains sustainable,” the SBP said in a monetary policy statement. The SBP previous inflation forecast was 7-9 percent for the current fiscal year.

“Due to recent higher than expected out turns, SBP expects inflation to average 9 – 11 percent this fiscal year. Looking ahead, based on this momentum and the expected path of energy tariffs, inflation is likely to remain within the revised forecast range for the remainder of the fiscal year,” the statement said. The central bank, however, sees its demand compressing measures and tightening of the fiscal policy by the government will help reduce medium-term inflationary pressure. “Subsequently, as global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5-7 percent during FY23,” it added.

The SBP had increased policy rate by 275 basis points since September 2021. The central bank however ruled out any further hike in interest rates at least in the near-term. “Following today’s rate increase and given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved,” the statement said. “Looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near-term.”

The SBP expects the current account deficit to be around 4 percent of gross domestic product this year, higher than the earlier projection of 2-3 percent. The current account gap has increased sharply this year due to a rise in imports, and recent out turns have been higher than earlier expected. Imports rose to $32.9 billion in July-November FY2022, compared with $19.5 billion in the same period last year, according to the monetary policy statement. Around 70 percent of this increase in imports stems from the sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand.

However, the central bank noted that “the current account imbalance is likely to be fully financed from external inflows and the foreign exchange reserves could remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates”.

“While in the near-term monthly current account and trade deficit figures are likely to remain high, they are expected to gradually moderate in the second half of FY22 as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks,” it added.

“In addition, recent policy actions to moderate domestic demand including policy rate hikes and curbs on consumer finance and proposed fiscal measures, should help moderate growth in import volumes through the rest of the year.”

The SBP sees economic growth to be close to the upper end of the forecast range of 4-5 percent as the Omicron coronavirus variant hasn’t created renewed uncertainty. “The emergence of the new Coronavirus variant, Omicron, poses some concerns, but at this stage there is limited information about its severity,” it said. “The MPC noted that Pakistan had successfully coped with multiple waves of the virus, which supported a positive outlook for the economy.”