Central bank raises policy rate to 13.75% amid inflationary pressures.

KARACHI -- The State Bank of Pakistan's Monetary Policy Committee (MPC) on Monday raised the policy rate by 150 basis points to 13.75 percent on pretext of rising inflationary pressures and need of fiscal consolidation measures.

The MPC also emphasised the urgency of strong and equitable fiscal consolidation to complement recent monetary tightening actions to alleviate pressures on inflation, market rates and the external account, said a statement issued here after MPC meeting.

The rate hike will help moderating demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability, the monitory policy committee hoped.

The MPC reviewed provisional growth estimates for FY22, external pressures and inflation outlook that deteriorated due to both home-grown and international factors and observed that an expansionary fiscal stance intensified by the recent energy subsidy package, has fuelled demand while lingering policy uncertainty has compounded pressures on the exchange rate.

The MPC noted that Russia-Ukraine conflict and new Covid wave in China globally triggered multi-year high inflation and a challenging outlook.

Pakistan's economic growth in FY 2022 is accelerating to 5.97 percent, as per provisional estimates, while after contraction due to Covid in 2020 it has rebounded much more strongly than anticipated growing by 5.7 percent last year, the monitory policy statement said.

The MPC also taken inflationary pressures under consideration noting that being in double digits for six consecutive months headline inflation in April unexpectedly rose to 13.4 percent a two-year high while inflation momentum was also elevated, at 1.6 percent (m/m), and core inflation rose further to 10.9 and 9.1 percent in rural and urban areas, respectively.

On the external front, though current account deficit during April moderated, the Rupee depreciated further due both to domestic uncertainty as well as recent strengthening of the US dollar in international markets following tightening by the Federal Reserve.

Under the assumption of continued engagement with the IMF, likely reversal of fuel and electricity subsidies together with normalisation of the petroleum development levy (PDL) and GST taxes on fuel during FY23 the MPC seen probability of temporarily increase in headline inflation in the next fiscal year.

But fiscal consolidation, moderating growth, normalisation of global commodity prices, and...

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