SBP raises policy rate by 100 bps to 22%

June 26, 2023 (MLN): The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to raise the policy rate by 100 bps to 22%, effective June 27,  2023, the statement issued by MPC right after the emergency meeting on Monday.

It is important to note that in its scheduled meeting on June 12, 2023, the committee kept the policy rate unchanged at 21%, citing that the monetary policy stance was appropriate to achieve the objective of price stability “barring any unexpected domestic and external shocks." The MPC further noted that this outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”

What prompts the MPC to abruptly raise the policy rate?

The committee has noted two important domestic developments since the last meeting that have slightly deteriorated the inflation outlook and which could potentially increase pressure on the already stressed external account.

First, there are certain upward revisions in taxes, duties, and PDL rates in the FY24 budget as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on the prioritization of imports.

Upside taxation appeasing IMF to spike inflation further

While the MPC views these measures as necessary in the context of the completion of the ongoing IMF program, they have increased the upside risks to the inflation outlook.

The committee views that additional tax measures are likely to contribute to inflation both directly and indirectly, while the relaxation in imports may exert pressure on the foreign exchange market. The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices.

The MPC views this action as necessary to keep the real interest rate firmly in the positive territory on a forward-looking basis.

This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium-term target of 5%-7% by the end of FY25, barring any unforeseen developments.

The MPC views that today’s decision - along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty.

The committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term.

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