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State Bank Boosts Interest Rate To 13.75 Percent

The inflation prognosis has deteriorated owing to domestic and foreign causes. An expansionary fiscal attitude this year, accentuated by the latest energy subsidy package, has boosted demand and added pressure to the currency rate.

The State Bank of Pakistan (SBP) hiked the main interest rate by 150 basis points, to 13.75 percent.

This is the highest rate since 2011’s 14%.

The SBP stated growth in FY22 has been substantially better than predicted since the last MPC meeting.

The MPC raised the policy rate to 13.75 percent on Monday. This approach, along with budgetary consolidation, should assist control demand, stabilise inflation expectations, and manage external stability threats.

The inflation prognosis has deteriorated owing to domestic and foreign causes. An expansionary fiscal attitude this year, accentuated by the latest energy subsidy package, has boosted demand and added pressure to the currency rate.

The Russia-Ukraine war and the current Covid wave in China have fueled global inflation. Almost all central banks face multi-year high inflation and a tough future.

The MPC said the rate rise would protect external and price stability.

Since the last MPC meeting, short-term secondary market yields, benchmark rates, and cut-off rates have climbed. The MPC underlined that market rates should be linked with the policy rate and that the SBP would take necessary action if they were not.

Perishable food products and core inflation drove headline inflation from 12.7% to 13.4% in April, the statement said.

“Core inflation reflects robust domestic demand and second-round supply shocks,” it stated.

As energy and fuel subsidies are repealed, inflation may increase briefly and remain high through FY23 before falling dramatically in FY24.

This baseline estimate is dependent on global commodity prices and local fiscal policies, it noted.

Deficit

In April, Pakistan’s current account deficit decreased to $623 million, less than half the average for the current fiscal year, on fewer imports and record remittances.

According to PBS, the trade imbalance dropped 24% since November. These trends are consistent with SBP’s forecast of a 4% current account deficit this year.

“Next year, the current account deficit is forecast to reduce to roughly 3% of GDP as import growth slows with softening demand and recent government initiatives to curb non-essential imports, while exports and remittances remain resilient.

This narrowing of the current account deficit and continued IMF support will ensure that Pakistan’s external financing needs during FY23 are more than fully met, with an almost equal share coming from rollovers by bilateral official creditors, new lending from multilateral creditors, and bond issuances, FDI, and portfolio inflows.

As a result, SBP’s foreign exchange reserves should resume their rising trend in the next fiscal year, the SBP stated.

The announcement came as the local currency maintained its 13-session decline against the US dollar, falling to 200.93, down 0.39 percent.

Given the economy, the MPC’s statement was eagerly expected.

This is the first MPC announcement since government changes and Dr Murtaza Syed’s appointment as SBP interim governor.

The MPC raised the policy rate by 250 basis points in an emergency meeting on April 7, bringing it to 12.25 percent.

Updates

Pakistan has several issues, including dwindling foreign exchange reserves, a dropping currency, a current account deficit, and rising inflation.

Islamabad is also in negotiations with the IMF to revive its delayed Extended Fund Facility (EFF), which would release a $900 million tranche and attract funding from other creditors.

Aimen Bukhari
Written By

Works at The Truth International Magazine. My area of interest includes international relations, peace & conflict studies, qualitative & quantitative research in social sciences, and world politics. Reach@ aimen.bukhari@tti.org.pk

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