Central bank hikes policy rate by 300bps, highest-ever since October 1996

The State Bank of Pakistan (SBP) announced on Thursday that it had increased the interest rate by 300 basis points (bps) to 20 per cent, citing rising inflation.

The key rate of the State Bank of Pakistan is now at the highest level since October 1996.

“This decision reflects deterioration in inflation outlook & its expectations amid recent external and fiscal adjustments. MPC believes this outlook warrants a strong policy response to anchor inflation expectations around the medium-term target of 5-7 percent,” the central bank said in a statement.

“MPC noted that reduction in CAD is important but requires concerted efforts to improve the external situation. It emphasized that any significant fiscal slippage would undermine monetary policy effectiveness in the context of achieving the price stability objective,” the SBP added.

Earlier on Feb 28, the SBP had said it had called a meeting of its Monetary Policy Committee on March 2 (today) — two weeks earlier than scheduled — when it was expected to raise the main policy rate.

“The forthcoming meeting of the Monetary Policy Committee has been preponed and now it will be held on Thursday, March 02, 2023,” the SBP had said in a brief statement.

The next meeting of the central bank’s Monetary Policy Committee was initially scheduled for March 16. Off-cycle rate reviews are not uncommon though.

Pakistan is undertaking key measures to secure IMF funding, including raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. While the government expects a deal with the IMF soon, media reports say that the agency expects the policy rate to be increased as well.