SBP raises Policy Rate by 100bps

July 16, 2019 (MLN): The Governor of State Bank of Pakistan, Dr. Raza Baqir has announced further tightening in Monetary Policy for the next two months, thus bringing it up by 100 basis points (bps) to 13.25%.

A meeting of the Monetary Policy Committee (MPC) took place in Karachi today, whereby the committee decided upon the aforementioned action.

The outcome of the meeting was in line with market expectations, wherein various analysts predicted the policy rate to go up by 100bps.

The rates will be applicable from July 17, 2019.

The decision takes into account upside inflationary pressures from exchange rate depreciation since the last MPC meeting on 20th May 2019 and the likely increase in near term inflation from the one-off impact of recent adjustments in utility prices and other measures in the FY20 budget.

The decision also takes into account downside inflation pressures from softening demand indicators. Taking these factors into consideration, the MPC expects average inflation of 11 –12 percent in FY20, higher than previously projected.

Nevertheless, inflation is expected to fall considerably in FY21 as the one-off effect of some of the causes of the recent rise in inflation diminishes.

With this decision on interest rates, the MPC is of the view that the adjustment related to interest rates and the exchange rate from previously accumulated imbalances has taken place.

Going forward the MPC will be ready to take action depending on economic developments and data outturns. Unanticipated increases in inflation that adversely affect the inflation outlook may lead to further modest tightening. On the other hand, a greater than expected softening in domestic demand and downward revision in projected inflation would provide grounds for easing monetary conditions.

In reaching this decision the MPC considered the key economic developments since the last MPC meeting on 20th May 2019, developments in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

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