In a meeting held on April 04, 2023, the Monetary Policy Committee (MPC) of State Bank of Pakistan decided to increase the policy rate by 100 basis points to 21 percent effective from April 05, 2023. The MPC noted that inflation in March 2023 rose further to 35.4 percent and is expected to remain high in the near term. However, there are early indications of inflation expectations plateauing, albeit at an elevated level. The MPC views today’s decision as an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability. The Committee further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate.Since the last meeting, the Committee noted three important developments having implications for the macroeconomic outlook. First, the current account deficit has narrowed considerably, more than previously anticipated, mainly on the back of sizable import containment. Nonetheless, the overall balance of payments position continues to remain under stress, with foreign exchange reserves still at low levels. Second, significant progress has been made towards completion of the 9th review under the IMF’s Extended Fund Facility (EFF) program. Third, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions. These have added to the difficulties of the emerging market economies like Pakistan to access international capital markets.In this context, the MPC considers the current monetary policy stance appropriate, and stresses that decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next 8 quarters. However, the Committee noted that uncertainties attached with the global financial conditions as well as the domestic political situation, pose risks to this assessment.As the MPC had anticipated, national CPI inflation further rose to 35.4 percent in March 2023, resulting in average inflation of 27.3 percent during Jul-Mar FY23. The MPC noted that the surge in inflation was broad-based, though a large part of it was contributed by food and energy components. This reflects the passthrough of increases in taxes and duties, unwinding of untargeted energy subsidies and the recent exchange rate depreciation. Importantly, core inflation has risen to 18.6 percent in urban and 23.1 percent in rural baskets, indicating the second-round impacts of the abovementioned adjustments. The Committee also viewed the increase in core inflation as partly driven by the elevated inflation expectations, as indicated by recent sentiment surveys. To anchor these expectations, the MPC views its current monetary policy stance as appropriate to keep the real interest rate in positive territory on a forward-looking basis.For details, press release may be viewed at the following link: https://www.sbp.org.pk/press/2023/Pr-04-Apr-2023.pdf
Source: IBP