KARACHI: The State Bank of Pakistan (SBP) on Friday announced an increase of 150 basis points in the benchmark policy rate taking it to 8.75 percent for the next two months effective from December 1, 2021.
According to a statement issued by the central bank on Friday, the decision to increase the interest rate to 8.75 percent has been taken because of risks related to inflation.
“With risks rotating from growth to inflation and the current account faster than expected, there is now a need to proceed faster to normalise monetary policy to counter inflation and preserve stability with growth,” the statement said.
In its forward guidance, the central bank said, “Looking ahead, the MPC reiterated that the end goal of mildly positive real interest rates remains unchanged, and given today’s move, expects to take measured steps to that end.”
The monetary policy committee at the central bank tightened interest rates keeping in view rising inflationary pressure due to rupee depreciation, a potential increase in utility tariffs and an upward trend in prices of petroleum products and essential food items in global markets.
The central bank had earlier brought forward its monetary policy review meeting in light of “recent unforeseen developments that have affected the outlook for inflation and the balance of payments.”
During the day, the State Bank also released current account data which posted a deficit of $1,663 million for the month of October 2021 compared to a surplus of $448 million in the same month of the last year.
Interest rates are used by the central bank as a tool to control inflation, regulate unnecessary movements in currency rates and give guidance to the national economy.
In its previous policy review, the central bank had increased the benchmark policy rate by 25 bps to 7.25%. Accordingly, the real interest rate (inflation reading subtracted from the benchmark interest rate) was recorded at negative 2%, as inflation reading came in at 9.2% in October.
Inflation in Pakistan has increased markedly with the resumption of economic activities but as supply-side inflation has subsided, demand-side inflation has overshot. Headline inflation initially remained low averaging at 8.7% during 4MFY22, but now, even with the base effect waning, it has started accelerating, raising concerns.