The State Bank of Pakistan (SBP) on Thursday decided to increase the policy rate by 300 basis points to 20%.
The decision was taken in a lengthy, rescheduled meeting of the SBP’s Monetary Policy Committee.
During the committee’s last meeting in January, it had highlighted near-term risks to the inflation outlook from external and fiscal adjustments.
Most of these risks have materialized and are partially reflected in the inflation out turns for February.
The national CPI inflation has surged to 31.5% year-on-year, while core inflation rose to 17.1% in urban and 21.5% in rural basket in February.
As a result of a reduction in the exchange rate, there has been a significant impact on inflation, said an SBP spokesperson.
Inflation outlook
In Thursday’s meeting, the committee noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near term inflation outlook and a further upward drift in inflation expectations, as reflected in the latest wave of surveys.
The committee expects inflation to rise further in the next few months, as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace.
The average inflation this year is now expected in the range of 27-29% against the November 2022 projection of 21-23%.
In this context, the MPC emphasized that anchoring inflation expectations is critical and warrants a strong policy response.
On the external side, the MPC noted that despite a substantial reduction in the current account deficit (CAD), vulnerabilities continue to persist.
In January, the CAD fell to $242 million, the lowest since March 2021. Cumulatively, the CAD – at $3.8 billion in Jul-Jan FY23 – is down 67% compared to the same period last year.
Notwithstanding this improvement, scheduled debt repayments and a decline in financial inflows amid rising global interest rates and domestic uncertainties, continue to exert pressure on forex reserves and the exchange rate.
