In an off-cycle review, the State Bank of Pakistan(SBP) has raised the benchmark interest rate by 300 basis points citing inflation; it is also the highest level since October 1996. “The Monetary Policy Committee decided to raise the policy rate by 300 basis points to 20 percent in its meeting today,” reads the Twitter update from the central bank.
1/3 The Monetary Policy Committee decided to raise the policy rate by 300 basis points to 20 percent in its meeting today. https://t.co/8ceKtaFu3j pic.twitter.com/OZA85p0Ewx
— SBP (@StateBank_Pak) March 2, 2023
Hike in Interest Rate and the IMF Loan Program
As per media speculations, the coalition government had agreed to hike the interest as it was one of the major conditions put forth by the fund to revive the loan program. The country is taking intense measures such as; raising taxes, removing subsidies, and artificial curbs on the exchange rate just to secure IMF funding.
The MPC has acknowledged that the recent fiscal adjustments and depreciation of the exchange rate have resulted in a significant deterioration of the near-term inflation outlook; which has also led to an increase in inflation. The projected average inflation rate for this year is now estimated to be between 27 percent to 29 percent, compared to the November 2022 projection of 21 percent to 23 percent.
Business Community Reacts Strongly to the Development
The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) wrote a letter to the SBP governor stating that G8 started hiking interest rates aggressively well before America’s Federal Reserve failed in containing inflation and this crushed their economies. Moreover, the country’s current policy rate of 17% is well above China, India, and Bangladesh. “Inflation in Pakistan appears more entrenched which mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs and other measures prescribed under the International Monetary Fund (IMF) program,” reads the letter.
Also read: State Bank of Pakistan raises Interest Rates to an All time High of Two Decades