By Staff Reporter
KARACHI: The State Bank of Pakistan raised its benchmark interest rate by 100 basis points to 17 percent on Monday as inflation remains elevated, and the central bank says that there will be no letup in flight to tame inflation.
The central bank’s benchmark interest rate is now the highest in more than 24 years.
“The inflation pressure persists and on this basis the MPC (monetary policy committee) emphasized to control inflationary pressures,” central bank Governor Jameel Ahmad told a news conference.
“Core inflation is still rising consistently for the last 10 months and we are having major challenges on the external side,” said Ahmad. “In the given situation we want to keep the signals right. We don’t want to give any signal to the market that everything is alright and we are holding rates at current levels or thinking of reversal.”
“The MPC views that anchoring of inflation expectations is important to achieve the medium term inflation target of 5 – 7 percent by December 2024 and requires coordinated monetary and fiscal policy efforts,” he added.
The governor said the government’s 2 percent economic growth estimate this year may see pressure.
The central bank raised the target rate by a total of 625 basis points in 2022.
“Near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit,” SBP said in a statement. Slowing global demand could affect exports and remittances, it added.
Pakistan’s economy is in virtual recession as the World Bank has projected growth of 2 percent, is about the same as population growth, for the current fiscal year, citing “precarious economic situation, low foreign exchange reserves and large fiscal and current account deficits” among the primary reasons.
The country is in dire need of funds to cover its current account deficit and debt obligations. The country’s official foreign reserves have fallen to as low as $4.5 billion, barely enough to cover three weeks of imports.
The country’s economic woes deepened after the International Monetary Fund delayed its latest loan installments under a bailout programme. Pakistan’s ninth review of staff-level talks with the IMF for the release of its next tranche has been delayed since September.
The differences between the two sides persisted over tax collection targets, and non-starter energy reforms including hiking of gas tariff, rising circular debt, and expenditure overrun, making it difficult to have consensus on a staff-level agreement for completion of the review.
Ahmad said Pakistan is expecting progress in the talks with the IMF soon and dollar inflows will come once that’s completed.
The central bank statement said the MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.
Although some moderation was seen in inflation in November and December, it remains high and core inflation has been on a rising trend for the last 10 months, the bank added.
The MPC also noted that the country’s current fiscal stance is inconsistent with monetary tightening.
“Thus, given the evolving macroeconomic challenges, it is important for fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth,” it added.
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