KARACHI: Pakistan’s central bank on Thursday increased the key interest rate by 125 basis points (bps) to 15 percent to control runaway inflation and "give relief to the common man," the acting State Bank governor announced.
In the monetary policy announced in May 2022, the central bank had increased the policy rate by 150 bps to 13.75 percent with the same objective of taming rising inflation. However, after the end of fuel subsides on power and petroleum products over the last 5 weeks, the country in June 2022 recorded 21.3 percent inflation, the highest in 13 years.
“At today’s meeting, the Monetary Policy Committee decided to raise the policy rate by 125 basis points to 15 percent,” Dr. Murtaza Syed, the acting Governor of the State Bank of Pakistan (SBP), said at a virtual press conference.
“The state bank realizes that in these days the common man is facing difficulties ... inflation is too high and prices of food items have been increased," he said. "But to end fuel subsidies on electricity and petroleum products was the right decision but difficult decision of the government. State bank and state bank’s policy is giving much emphasis to control inflation because it is causing difficulties for our economy.”
The acting governor said controlling inflation was an important objective of the central bank to give relief to the common man but warned that inflation would remain on the "higher side" for at least a year.
“Inflation will remain high at least for a year but we will try that it does not increase too much. We will try to control month-on-month but the year-on-year will unfortunately remain on higher side. We will see that it will remain 18 to 20 percent in current fiscal year as the prices have been increased, before declining sharply during FY24.”
The central bank said looking ahead, growth was expected to moderate to 3-4 percent in FY23, on the back of monetary tightening and fiscal consolidation, helping to close the positive output gap and diminish demand-side pressures on inflation.
"This will pave the way for higher growth on a more sustainable basis," the bank said in its policy statement.
The central bank also decided to keep the Export Finance Scheme (EFS) and Long-Term Finance Facility (LTFF) less than 5 percent of the policy rate to facilitate exporters.
“The interest rates on EFS and LTFF loans are now being linked to the policy rate to strengthen monetary policy transmission, while continuing to incentivize exports by presently offering a discount of 500 basis points relative to the policy rate,” the statement added.
The central bank said the current account deficit unexpectedly spiked in May 2022 and the trade deficit continued its post-March widening trend to reach a seven-month high in June 2022, on burgeoning energy imports. As a result, foreign exchange reserves and the rupee remained under pressure, further worsening the inflation outlook.
The central bank's weekly foreign exchange reserves data released on Thursday indicated a decline during the week ended on June 30, 2022, by $493 million to $9.8 billion, due to external debt and other payments.