On Tuesday, Pakistan’s central bank increased its key interest rate by 100 basis points (BPS) to a record 21% as the cash-strapped country sought to reduce severe food inflation and keep the trust of foreign creditors. The State Bank of Pakistan (SBP) has hiked its key rate by a cumulative 1025 bps since January 2022.
1/4 Monetary Policy Committee decided to increase policy rate by 100bps to 21% in its meeting today.https://t.co/JeUhdtDFrq pic.twitter.com/6avIFg4S6c
— SBP (@StateBank_Pak) April 4, 2023
The key rate of the SBP now stands at its highest-ever level as the country struggles with consumer price inflation, reaching its highest annual level of over 35% in March. The rupee depreciated to its lowest level ever as it closed at 287.29 against the dollar after falling more than 1% during the day, as reported by Reuters.
“The MPC considers the current monetary policy stance appropriate and stresses that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next eight quarters,” the bank stated in a statement and added that the early conclusion of the ninth review of the IMF program was critical to rebuilding FX reserve buffers.
The macroeconomic outlook has been affected by several significant changes that were acknowledged by the Monetary Policy Committee. The committee observed that significant import restraint had resulted in an important reduction in the current account deficit. Nonetheless, it noted that the Balance of Payments (BoP) position is still fragile since foreign exchange reserves are still at very low levels.
Investors polled by Reuters had mostly expected a rate hike of 200 basis points. According to Tahir Abbas, head of research at Arif Habib Limited, there are signs that a general economic slowdown is already inevitable, which is why the SBP may have refrained from a more aggressive rate hike.
“A majority of the high-frequency indicators already depict negative growth and a massive slowdown in the economy,” he remarked. “An aggressive rate hike won’t be of much help,” he further said.
Early in March, the bank increased its key rate by 300 basis points to 20%, outpacing market forecasts and probably doing so to satisfy an important International Monetary Fund (IMF) stipulation for the release of the awaiting bailout money.
Prices for food, drinks, and transportation have all increased by more than 45%, and the government is in discussions with the IMF to release its next tranche, which will be worth about $1.1 billion as part of a $6.5 billion rescue agreement reached in 2019.
A weakening currency, rising energy prices, and higher food prices because of Ramazan have all contributed to Pakistan’s high inflation rate, which has been exacerbated by global growth in consumer prices. Soaring prices have put pressure on household budgets and left many in dire financial crises.
The government started a programme to give free wheat to low-income families throughout the holy month to lessen the effects of record-breaking inflation and accelerating poverty. However, the initiative resulted in violence and stampedes, which has resulted in at least 21 fatalities since the beginning of Ramazan.
The desperation of people along with the paucity of food has led to violence, stampede, loot and robbery of food articles from trucks and distribution points.
