ShreeMetalPrices: Pakistan’s central bank raises the Interest Rate by 300 bps as country faces greatest inflation in 50 years


Pakistan’s central bank hiked its benchmark interest rate by 300 bps on Thursday. Surpassing investor forecasts, as the cash-strapped government strives to persuade the International Monetary Fund (IMF) to release essential loans. Consumer price inflation (CPI) has reached its highest level in over 50 years.

The benchmark rate of the State Bank of Pakistan (SBP) is currently at 20%. Its highest level since Oct 1996. Investors
Capital Economics stated in a report, “We estimate another 200 basis points of rises over the months ahead.
Local media reported that the SBP had moved up the MPC conference from its intended date of March 16. Since the rate increase was a crucial need to have the IMF money disbursed.

The Pakistan’s central bank increased the rate to 17% during its most recent policy meeting in Jan by 100 basis points. Since Jan 2022, it has raised rates a total of 1025 basis points.

According to the current wave of surveys, “the MPC highlighted that the recent budgetary adjustments. And currency rate depreciation have contributed to a considerable worsening in the near-term inflation forecast or a further upward shift in expected inflation,” the SBP said in a note.

The SBP expects inflation to increase more before it starts to decline. The central bank reported that, as opposed to the Nov 2022 prediction of 21-23%. The average annual inflation rate is now projected to be in the range of 27-29%.

In this backdrop, the MPC stressed the importance of anchoring inflation expectations and the need for a robust policy response.

Pakistan’s CPI Increases

According to Suleman Maniya, head of advisory at Vector Securities. While the govt must quickly concentrate on boosting the supply side, notably of agricultural & food commodities. The CPI might potentially climb higher as a result of fiscal actions connected to the elimination of subsidies or exchange rate weakness.

The govt has permitted the rupee to weaken in an effort to reduce spending and raise money through taxes.

In February, Pakistan’s CPI increased 31.5% over the previous year due to increases in the cost of food, beverages, and transportation that exceeded 45%.

The worldwide lender is scheduled to deliver a tranche of more than 1 billion dollars to Pakistan in accordance with the 9th review of a prior agreement with the IMF.

According to a report from the state bank, Pakistan’s central bank’s foreign exchange reserves as of Thursday were $3.814 billion, an increase over the prior week. Planned debt repayments and a reduction in financial inflows amid rising worldwide interest rates & local concerns continue to put pressure on foreign exchange reserves & the exchange rate, it stated in its policy rate statement.

Also, it stated that improved external position requires purposeful measures as FX reserves remain low. On Thursday, the Pakistani rupee dropped approximately 6 percent of its value versus the US dollar because the International Monetary Fund (IMF) fund release was unclear.

The IMF’s next tranche might be unlock with today’s currency decline and policy rate increase. According to Saad Rafi, head of equities at Al Habib Capital Markets.

The MPC also chose to change the date of its subsequent meeting from the originally planned Apr 27 to Apr 4.