Thursday, December 7, 2023

State Bank Increases Interest Rate by 300bps to 20%, Highest in 27 Years

The State Bank of Pakistan has increased the policy rate by 300 basis points, which is the highest since October 199. In an effort to persuade the International Monetary Fund to release crucial money, Pakistan’s central bank increased its benchmark interest rate by 300 basis points on Thursday, outpacing investor expectations.

The 20% rate hike came as part of the country’s bid to secure a $1 billion loan from the International Monetary Fund (IMF). In defence of its move, the State Bank of Pakistan said the decision reflected the “deterioration in the inflation outlook” and its expectations amid recent external and fiscal adjustments.

The central bank’s Monetary Policy Committee (MPC) stated that it thought this scenario called for a robust policy response to keep inflation expectations anchored around the medium-term objective of 5-7%.

The central bank added that while reducing the current account deficit (CAD) was crucial, it also necessitated coordinated efforts to improve the external environment. It further emphasised that any considerable budgetary slippage would reduce the efficacy of monetary policy in pursuing the goal of price stability.

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