To maintain the balance between inflation and economic growth, the State Bank of Pakistan (SBP) hiked the monetary policy rate by 150 basis points to 13.75 percent on Monday.
“The MPC increased the policy rate by 150 basis points to 13.75 percent. This measure, together with much-needed fiscal consolidation, should assist reduce demand at a more sustainable pace while maintaining inflation expectations and managing risks to external stability,” according to the central bank.
According to initial projections, the economy has returned far more robustly than expected after falling by 0.9 percent in FY20 as a result of Covid, rising by 5.7 percent last year and 5.97 percent this year.
Read more: State Bank hikes interest rate to 12.25% to avert growing risks to economy
“The MPC’s baseline outlook for FY23 assumes continuing engagement with the IMF, as well as the reversal of fuel and electricity subsidies, as well as normalization of the petroleum development levy (PDL) and GST on fuel.” Under these assumptions, headline inflation is expected to rise temporarily and then stay high for the rest of the fiscal year.
Fiscal consolidation, moderating growth, adjustment of global commodity prices, and favourable base effects are likely to drive it down to the 5-7 percent target range by the end of FY24, according to the statement.
Simultaneously, the MPC underscored the importance of a substantial and equitable fiscal consolidation to complement today’s monetary tightening measures. This would help to relieve inflation, market rate, and foreign account pressures.
Previously, the State Bank of Pakistan (SBP) established the monetary policy rate at 12.25 percent in April of this year.
