The State Bank of Pakistan’s Monetary Policy Committee (MPC) increased the key policy rate by 100 basis points to 16 per cent on Friday, the highest level since 1999.
The decision, according to the central bank, reflects the MPC’s belief that inflationary pressures have proven to be higher and more persistent than anticipated, according to a statement released following the meeting.
“This decision is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” the MPC said.
The SBP stated that, notwithstanding the continuous slowing in the economy, supply shocks both domestically and globally are increasingly responsible for inflation.
“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth,” the statement read, adding that consequently the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.
The MPC also pointed out that the immediate costs of fighting inflation are less than the long-term consequences of letting it persist. In the meanwhile, reducing food inflation through administrative steps to clear supply-chain snags and any required imports continues to be a top focus.
From September 2021 to November 2022, the central bank raised the interest rate by a total of 900 basis points, bringing it to 16 per cent.
However, the committee noted that core inflation and rising food costs are now anticipated to raise average inflation for FY23 to 21-23 per cent.
