KARACHI: The State Bank of Pakistan (SBP) on Friday increased its policy rate (interest) by 150 basis points to 8.75 percent till the next Monetary Policy Committee meeting scheduled on December 14.
The MPC in its meeting here today decided to raise the policy rate 8.75 percent, which reflected its view that since the last meeting, risks related to inflation and the balance of payments had increased while the outlook for growth had continued to improve, said SBP statement.
The heightened risks related to inflation and balance of payments stem from both global and domestic factors. Across the world, price pressures from Covid-induced disruptions to supply chains and higher energy prices are proving to be larger and longer-lasting than previously anticipated.
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In response, central banks have generally begun to tighten monetary policy to keep inflation expectations anchored. In Pakistan too, high import prices have contributed to higher-than-expected CPI, SPI, and core inflation outturns.
At the same time, there are also emerging signs of demand-side pressures on inflation and inflation expectations of businesses have risen on account of further upside risks from domestic administered prices.
With respect to the balance of payments, the current account deficits in September and October have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand. The burden of adjusting to these external pressures has largely fallen on the rupee.
As a result of these developments, the balance of risks has shifted away from growth and toward inflation and the current account faster than expected.
Accordingly, the MPC was of the view that there is now a need to proceed faster to normalize monetary policy to counter inflationary pressures and preserve stability with growth.
While the market-based exchange rate has played its due role as a shock absorber, it has borne a considerable burden in terms of adjusting to the widening current account deficit. The rupee has depreciated by a further 3.4 percent since the last MPC meeting.