State Bank sets interest rate at 15% to tame 13-year high inflation

State Bank

The State Bank of Pakistan (SBP) has increased its key policy rate by 125 basis point to 15 percent during its review on Thursday, as it aims to tackle 13-year high retail inflation, in accordance with the median estimate in a snap poll of 10 economists and market watchers.

The analysts, economists, and senior professors surveyed were extensively split on the quantum of increase by the SBP, with opinions ranging from 50 to 200 basis points. Two respondents did not see a necessity for a rate increase.

State Bank acting Governor Dr. Murtaza Syed conducted a press conference on the same day after the monetary policy committee (MPC) meeting.

During its last meeting in May, the MPC announced a raise of 150 basis points in the key interest rate.

With the recent policy rate at 13.75% and inflation running well above, real interest rates in the economy have turned suddenly negative.

Read more: State Bank raises interest rate to 11-year high of 13.75%

“The last monetary policy committee statement is proof that the SBP is way behind the curve on anticipating inflation,” Yousuf Nazar, an economist said.

“Another hike would increase government debt servicing costs as well as hurt industries. It is not going to have much of an impact on exchange rate or overall demand,” he remarked.

“The overall policy mix is geared towards stabilization and demand management,” Macro Economic Insights CEO Sakib Sherani said, adding that this will bring a sharp slowdown in the economy, maybe a recession, in the short run.

However, Fahad Rauf, head of research at Ismail Iqbal Securities, remarked that he does not see the necessity to increase rates further.

“The economy is already slowing down. The layoffs have started and are expected to increase further. Further cost pressures would only enhance the burden on industries and workers,” Rauf added.

“The fiscal arm is working now, tough measures have been taken. SBP needs to wait for the results before further tightening,” he maintained.

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