In order to combat inflation, the State Bank of Pakistan stated on Friday that it has raised the interest rate by 100 basis points (bps) to 16 percent.
Following a meeting of the bank’s Monetary Policy Committee, the statement was made (MPC).
According to the central bank, the goal of the move is to “prevent rising inflation from becoming entrenched and to minimise threats to financial stability, so clearing the path for faster growth on a more sustainable basis.” Higher food and core inflation were named as “major factors” to rising inflation by the SBP.
The bank maintained its growth forecasts for the fiscal year 2023 and the current account deficit (CAD) at 2 percent and 3 percent of GDP, respectively, from the previous policy statement.
The MPC believed that “inflationary pressures have proven to be higher and more persistent than predicted,” according to the SBP news statement, which was the basis for the decision to hike the policy rate.
The MPC noted that amid the ongoing economic slowdown, inflation was “increasingly being driven” by persistent global and domestic supply shocks that were raising costs.
“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth. As a result, 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. At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority,” the press release reads.
According to the news release, First, it stated that core inflation continued to rise. In contrast, headline inflation jumped “sharply” in October as the administrative decrease to energy rates from the previous month was reversed. Food prices also “accelerated rapidly” due to recent rainsÂ’ crop damage.
Second, the MPC noted that the current account deficit “significantly moderated” in September and October due to a substantial fall in imports. It further mentioned that despite this moderation and new assistance from the Asian Development Bank, external account problems still exist.
Thirdly, it stated that while growth and CAD predictions were expected to remain at 2 and 3 percent, respectively, average inflation for FY23 was predicted to be between 21 and 23 percent because of increasing food costs and core inflation.