State Bank Likely to Raise Interest Rate in Monetary Policy Committee’s Emergency Meeting

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The State Bank of Pakistan (SBP) will push up its Monetary Policy Committee meeting to March 2nd, 2023, and raise the policy rate to offset negative macros as the government works to meet the terms of a $6.5 billion bailout from the International Monetary Fund (IMF).

The market review had previously been scheduled for March 16 but will be convened two weeks prior and will likely increase the policy rate by at least 100-200 basis points to roughly 18-19 percent.

To recall, the SBP first increased the benchmark policy rate in January 2023, to 17 percent, the highest in over two decades. Pakistan’s bond auction last week signaled that the central bank is expected to raise its interest rate, which is seen as a condition for reviving the country’s loan program with the IMF. Analysts expect the rate hike by 150 to 250 basis points.

There have been a number of economic developments since the last monetary policy meeting. In response to IMF demands, the federal government has taken some steps to improve revenue collection. Not only has the government raised the rate of petroleum products and gas tariffs, but it has also raised the sales tax rate to 18 percent.

Notably, headline inflation has remained in the double digits since November 2021 mainly on the back of an uptick in food and energy prices. This phenomenon still continues with headline numbers hitting new highs with pressure mainly emanating from higher food and commodity prices, and exorbitant lending rates in secondary markets.

The MPC is not going to consider inflation trajectory alone, but also a few other developments in the economy such as the ones on the money market, which will be a key consideration in the policy decision.

In the previous policy statement, the committee stated that anchoring inflation expectations is critical to meeting the medium-term inflation target, which requires coordinated monetary and fiscal policy efforts.

Today, with the long-awaited staff-level agreement for the 9th review of the Extended Fund Facility (EFF) still pending, the IMF is demanding extra monetary tightening to keep inflation under control.

Treasury bill auction rates have already risen to 19.95 percent in the previous auction, and yields in all three tenors are at their highest levels since June 1998. It is only natural, and prudent, for the central bank to call an early market review to offset losses as a result of this.

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