KARACHI: The State Bank of Pakistan (SBP) has called an early meeting of its Monetary Policy Committee (MPC) to address the “recent unforeseen developments” that have changed the outlook for inflation and balance of payments.

In a brief press release issued on Tuesday, the central bank said the MPC meeting would now be held on Friday (Nov 19) instead of the previously announced date of Nov 26.

The announcement immediately attracted attention of bankers and analysts as speculation about the new interest rate spread in the financial market.

“The meeting has been brought forward in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments, and to help reduce the uncertainty about monetary settings prevailing in the market,” said the SBP.

The SBP is taking a number of measures to control the damage emerging out of increased inflation and galloping current account deficit.

In the previous monetary policy, the SBP had said that current account deficit would be in the range of two to three per cent of the GDP but the first quarter deficit exceeded the annual target to reach 4.1pc of GDP. Similarly, the higher volume and costly imports inflated the domestic market as prices went much beyond the assessment of the economic managers.

At the same time, the aggressive appreciation of the US dollar against the rupee dismantled exchange rate regime which was designed by the SBP to get positive results out of free float exchange rate without influencing the currency market.

The SBP put 100pc cash margin on hundreds of imported items to cut the import bill and reduce the pressure on dollar demand. However, this did not work.

In a recent move, the central bank increased the Cash Reserve Requirement (CRR) to 6pc from 5pc. It was aimed at curtailing the supply of liquidity that may bring down the import, force the banks to increase deposits and liquidate their dollar holdings.

“The MPC will take stock of these developments and decide about the monetary policy,” said the SBP.

What is more important for the financial market and other stakeholders of the economy are the interest rate as the real interest rate is significantly lower than inflation. Most of the bankers and analysts believe that time has come to increase the interest rate which was drastically reduced by 6.25 percentage points to 7pc in the first half of 2020 due to the Covid-19 pandemic. The SBP increased the interest rate by 25 basis points to 7.25pc in the previous monetary policy after a year keeping it constant at 7pc.

“I think the State Bank wants to end the uncertainty regarding interest rates,” said Samiullah Tariq, head of Research at Pak-Kuwait Investment Company, adding that this would be good for the market.

“The SBP is saying to reduce the uncertainty which means there is a lot speculation going in regarding increase in interest rates due to the International Monetary Fund (IMF) programme,” said Mohammad Suhail, CEO of Topline Securities. “Looks like they [SBP] want to clear this speculation and also want to give a signal to the IMF. It could be a prior action just like the CRR increase by 1pc,” he added.

Published in Dawn, November 17th, 2021