The State Bank of Pakistan (SBP) on Monday increased its key policy rate by 100 basis points to 17 percent — the highest since October 1997 and as feared by the market – citing inflation, external sector challenges, and global economic conditions as the factors behind the move.

Addressing a press conference after a Monetary Policy Committee (MPC) meeting, SBP Governor Jameel Ahmad said the meeting was of the view that inflationary pressure was persistent. “It noted that price stability was required to control inflation and maintain the growth rate.”

“If these remain unchecked, they could feed into higher inflation expectations over a longer than-anticipated period therefore 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,” Jameel warned.

Expressing his confidence that the Current Account Deficit in the current fiscal year will remain below $9 billion, he added, “Our short-term challenges, including current account deficit, remain. There is some delay in the inflows we were expecting due to which our reserves are under pressure.”

Thirdly, the committee noted the global economic situation, including the International Monetary Fund and the World Bank’s downgrading of the global economic growth rate and the prevailing uncertainty. “It affects our market directly or indirectly. For example, our exports and remittances are impacted.”

The MPC took the decision to raise the policy rate after a detailed analysis of the country’s external and fiscal position, the SBP governor said.

Jameel warned that there were risks to the GDP growth projection of 2pc made by the MPC at its last meeting in November, especially external issues.

“On the external side, we predicted the current account deficit would be $10 billion this year. Our actual performance during the first six months is better than expected. Despite a slowdown in exports and remittances, our current account deficit during July-Dec stood at $3.7 billion.”

“This means we are within our target. We now predict that we may be able to bring down the current account deficit below $9 billion,” the SBP governor said, noting it as a good development, which, he added, would reduce the country’s external financing requirements to an extent.

Jameel said the MPC also had a detailed analysis of the agriculture sector and inflation. “The committee believed that a 1 percent hike [in the interest rate] to anchor inflation was necessary.”

Moreover, near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit. “The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves,” he said.

The MPC also took notice of the global economic and financial conditions broadly remaining uncertain in the near-to-short term, leading to mixed implications for the domestic economy.

He elaborated that the expected slowdown in global demand could negatively impact the outlook of exports and workers’ remittances for emerging economies, including Pakistan.

“This would partly offset the gains from the import contraction. On the flip side, some moderation in international commodity prices may help reduce inflation and the improvement in global financial conditions may also provide some relief to the external sector.”

It’s developing story. Details to follow.

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