As the monetary policy committee prepares for its upcoming meeting on June 12, 2023, market expectations lean towards the State Bank of Pakistan (SBP) maintaining the policy rate at the current level of 21%.
Analysts at Arif Habib Limited said the decision to keep the rate unchanged comes after the SBP raised it by 100 basis points in the previous monetary policy statement (MPS) in April 2023, reaching a record high. While the focus remains on ensuring price stability, the central bank is faced with a critical choice that could shape the country’s economic trajectory.
READ MORE: Majority Expects Unchanged Policy Rate in Upcoming SBP Announcement
Given the benchmark policy rate already stands at a significant 21%, a key question arises: should the SBP push it even higher? While the allure of curbing inflation is strong, adopting a cautious approach might be necessary to preserve economic stability. The current high interest rate, coupled with other macroeconomic measures, has already impacted economic growth. The recently released provisional GDP growth number for FY23 stands at a mere 0.29%, with the industrial sector experiencing a negative growth of 2.94% (compared to +6.83% in FY22). Tight macroeconomic policies and increased cost of doing business have exerted downward pressure on aggregate demand. Thus, further interest rate hikes would only increase risks to overall growth and exacerbate economic challenges.
READ MORE: Pakistani Government Extends Deadline for Redemption of Prize Bonds
While combating inflation is crucial, it is essential to consider the underlying drivers of price increases. Recent inflationary readings indicate that higher taxes and duties, the reduction of untargeted subsidies, post-flood food inflation, and exchange rate depreciation have contributed to the rise in the Consumer Price Index (CPI). Notably, the headline inflation for May 2023 reached a historic high of 38.0%, primarily driven by soaring prices of food, clothing, energy, and other household items. These factors have also impacted core inflation, which stands at 20% YoY in urban areas and 26.9% in rural regions. Simply raising interest rates may not effectively address the root causes of inflationary pressure. Instead, adopting a holistic approach is necessary to develop a well-rounded strategy to tackle rising prices.
READ MORE: SBP’s Decision Sparks Optimism: Dollar Expected to See Significant Fall in Pakistan
With the SBP’s monetary policy committee meeting on the horizon, market expectations point towards the policy rate remaining unchanged at 21%. While inflationary pressures persist, cautious decision-making is required to maintain economic stability. Increasing the interest rate further would pose risks to overall growth and exacerbate economic challenges. Addressing the root causes of inflation through a holistic approach is crucial for ensuring long-term price stability. The SBP stands at a critical crossroad, where carefully considered decisions will shape the country’s economic trajectory.
