The State Bank of Pakistan (SBP) is anticipated to maintain the benchmark interest rate at 21% in its forthcoming monetary policy statement (MPS) scheduled for announcement today.
Despite elevated inflation levels, the Monetary Policy Committee, which considers macroeconomic fundamentals, is expected to retain the interest rate. In April, the MPC raised the benchmark policy rate by 100 basis points (bps) to reach a record high of 21%.
The central bank defended this decision as crucial for ensuring price stability and anchoring inflation to the medium-term target. According to a survey conducted by Arif Habib Limited, 77.3% of respondents from various sectors, including financial and non-financial services, believe that the policy rate will remain unchanged at 21%.
A minority of respondents, 22.7%, hold the opinion that the central bank will raise the policy rate by 100bps. The primary objective of increasing the policy rate is to discourage borrowing in the private sector, as an increase in currency in circulation tends to raise inflation.
Since April 2022, Pakistan’s key rate has seen a significant increase of 1,125 basis points (bps). Many analysts agree that with inflation reaching its peak and global commodity prices declining, there is no immediate urgency to further raise interest rates.
“They’ll point to a ‘plateauing of inflation’ as evidence that rates don’t need to go up,” stated Uzair Younus, Director of the Pakistan Initiative at the Atlantic Council’s South Asia Center.
In May, inflation reached a record high of 37.97%, marking the second consecutive month of such levels and the highest in South Asia, surpassing Sri Lanka’s annual inflation of 25.2% in May.
However, Shivaan Tandon, an economist at Capital Economics, expects a 100bps increase, emphasizing that the central bank cannot afford to keep the policy rate unchanged. Tandon argues that raising rates will help combat record-high inflation and provide support to the currency through monetary tightening.
“Rate hikes may also serve as a signal to potential creditors regarding the authorities’ commitment to resolving external imbalances,” Tandon added.
Published in PakWeb, June 13th, 2023.
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