Karachi, July 27, 2023 – The State Bank of Pakistan (SBP) is poised to make a crucial decision on the benchmark interest rate following the successful conclusion of a loan deal with the International Monetary Fund (IMF).
The announcement regarding the key policy rate, scheduled for Monday, July 31, 2023, comes at a time when interest rates are already at their highest level.
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In a surprise move, the central bank convened an emergent meeting on June 26, 2023, during which it decided to raise the policy rate by 100 basis points to 22 percent. This bold decision was quickly followed by the IMF team’s staff level agreement on June 30.
Notably, the IMF Executive Board granted approval for a $3.1 billion Stand By Agreement (SBA) for Pakistan on July 12, allowing the country to receive $1.2 billion as the first tranche of financial assistance.
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The recent release of the country report by the International Monetary Fund (IMF) has added more significance to the upcoming SBP meeting. The IMF report emphasizes the importance of adopting a tighter monetary policy stance to address the prevailing inflationary pressures and bring inflation back within the target range of 5-7 percent by the end of 2024-25. While acknowledging the recent policy rate increase as a positive step, the IMF expects inflationary pressures to persist in the coming year.
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To effectively anchor inflation expectations and achieve the desired results, the IMF recommends that the SBP continues its tightening cycle, utilizing higher interest rates and prudent liquidity injections based on incoming data as necessary. The goal is to establish real positive interest rates on a forward-looking basis and create a clear downward trajectory for both inflation and inflation expectations.
A survey conducted by Arif Habib Limited provides insights into market expectations ahead of the SBP meeting. According to the survey results, 59.1 percent of participants believe that the central bank will maintain the policy rate at the current level of 22 percent, while the remaining 40.9 percent predict a further 100 basis points increase in the policy rate.
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The decision on the benchmark interest rate will undoubtedly have significant implications for the country’s economic outlook and the ongoing efforts to stabilize the economy in line with the IMF deal. As businesses and investors eagerly await the central bank’s announcement, policymakers will be under pressure to strike the right balance between taming inflationary pressures and supporting economic growth in these challenging times.
