As a result of the raising of taxes and removing import guidelines, the State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) on Monday hiked the policy rate by 100bps to a record high of 22%. 

The SBP has raised rates by 1,250 basis points since January 2022.

The MPC explained the need for the emergency meeting by not raising the policy rate in its last meeting on June 12. Previously, it had viewed it as appropriate to achieve price stability “barring any unexpected domestic and external shocks”.

The SBP said, however, that it has decided to raise interest rates due to “two important domestic developments” that have “slightly deteriorated inflation outlooks and could potentially increase pressure on the already stressed external accounts”.

The FY24 budget as approved by the National Assembly on June 25 contains some upward revisions to taxes, duties, and PDL rates. As a second measure, the SBP withdrew its general guidance on import prioritisation on June 23,” said the MPC. Because of ongoing negotiations with the International Monetary Fund (IMF), the withdrawal of the import guideline was “necessary” but it has “increased inflation risks”.

The Committee believes that additional tax measures will likely contribute both directly and indirectly to inflation, while the relaxation of import controls may exert pressure on the foreign exchange market.” According to the central bank, the latter may result in higher domestic prices as a result of exchange rate changes.

A meeting of the MPC was convened to address these developments in view of this background.”. According to the central bank, the rate is to be raised by 100 basis points to 22 percent with effect from 27 June 2023. Keeping the real interest rate in the positive territory on a forward-looking basis was necessary, according to the statement.

By the end of FY25, the central bank expects the decision to “anchor inflation expectations” and “help bring inflation down towards medium-term targets of 5–7%”.

As part of today’s decision, the MPC expects the ongoing IMF program to be completed soon, and the government will adhere to its target of generating a primary surplus in FY24, helping address external sector vulnerabilities and reducing economic uncertainty. “The committee reiterates that it is ready to take appropriate action if necessary in order to achieve price stability over the medium term,” said the SBP.