• SBP says decision aimed at ensuring inflation doesn’t become entrenched
• Most analysts thought central bank would keep key policy rate steady

KARACHI: The State Bank of Pakistan (SBP) raised its key policy rate by 100 basis points to a 24-year high of 16 per cent on Friday in a decision that went against market expectations but, according to the central bank, was “aimed at ensuring that elevated inflation does not become entrenched”.

The decision reflected the SBP monetary policy committee’s (MPC) view that “inflationary pressures have proven to be stronger and more persistent than expected”, the central bank said in a statement after a committee meeting.

The move brings the SBP interest rates hikes to 625 basis points this year. It kept the rate unchanged at its last two meetings in October and September.

Central banks around the world tame inflation by raising interest rates, which depresses economic activity.

SBP Governor Jameel Ahmad said at an analyst briefing afterwards that the tightening so far was enough to achieve its current objectives, Reuters reported.

The SBP said while inflation was likely to be more persistent than previously anticipated, “it is still expected to fall towards the upper range of the 5-7 per cent medium-term target by the end of FY24, supported by prudent macroeconomic policies, orderly rupee movement, normalising global commodity prices and beneficial base effects”.

“Maintaining fiscal discipline is needed to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities,” it said.

In a Topline Securities survey earlier this month, most respondents forecast no change to the policy rate and a cut by fiscal year-end in June next year.

The headline inflation measure by the consumer price index (CPI) rose 26.6pc year-on-year in October despite devastating floods and attempts to maintain the fiscal discipline that have slowed the economy.

“Looks like the SBP is more concerned with rising inflation. Moreover, IMF talks for the next tranche are under way and are delayed, which may have also compelled the committee to take this step to fight inflation,” said Topline Securities’ CEO Mohammad Sohail.

The head of research at Arif Habib Limited, Tahir Abbas, said the global and domestic supply shocks, as well as energy tariff adjustments, had elevated inflation projections of the State Bank while external account challenges persisted. At 16pc, the interest rate was the highest since 1998 when it reached 16.5pc, he added.

“The rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response. The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched,” the SBP said.

Since the last meeting in September, the MPC noted three key domestic developments. First, headline inflation increased sharply in October. “Food prices have also accelerated significantly due to crop damage from the recent floods, and core inflation has risen further,” it said.

Second, a sharp decline in imports led to a significant moderation in the current account deficit in both September and October. “Despite this moderation and fresh funding from the [Asian Development Bank], external account challenges persist,” said the SBP.

Third, “after incorporating the Post-Disaster Needs Assessment of the floods and latest developments, the FY23 projections for growth of around 2pc and a current account deficit of around 3pc of GDP shared in the last monetary policy statement are re-affirmed”, said the SBP.

However, it said that higher food prices and core inflation were now expected to push average FY23 inflation up to 21-23pc.

Published in Dawn, November 26th, 2022

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