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SBP raises Cash Reserve Requirement to contain inflation

Moves to normalise policy settings as economy recovers from Covid shock. (Source: File)

KARACHI: The State Bank of Pakistan (SBP) has announced that it has increased the Cash Reserve Requirement (CRR) by one percentage point to 6pc for scheduled banks in order to contain monetary expansion.

In a statement on Saturday, the central bank also increased the minimum CRR to be maintained each day from 3% to 4%. The CRR is the amount of money that banks are required to keep with the central bank and is applicable on demand liabilities and time liabilities with tenor of less than a year.

The revised average CRR of 6% will be effective from November 12, 2021, whereas the revised daily minimum requirement of 4% will be effective from November 15, 2021, according to a statement issued by the central bank.

“In recent months, real money supply growth has drifted above its trend,” said the SBP, adding that the latest measure will moderate this growth as well as domestic demand, thereby helping to sustain the current economic recovery, achieve the government’s medium-term inflation target, and reduce pressures on the rupee.

“Time liabilities with tenor of more than one year shall continue to be exempted from maintenance of cash reserves,” said the statement

“With the economy recovering briskly from last year’s acute Covid shock, there is a need to gradually normalise the policy settings, including the growth of monetary aggregates,” it added.

In addition, this measure is likely to have a positive impact on deposit mobilisation as the banks will be encouraged to generate more deposits to cope with additional liquidity requirements for their operations.

“This will incentivise banks to offer better returns on deposits to attract funds and serve the SBP’s objective of encouraging savings,” the central bank stated.

The SBP raised the cash reserve ratio for banks for the first time in 13 years to curb excess liquidity on the banking system, which analysts had said is contributing to inflation.

Inflation accelerated 9.2% in October from 9% in September, as Pakistanis paid more for energy and food and analysts said inflation could stay uncomfortably high well into fiscal year 2021/22 amid a weak rupee and strong commodity prices globally.