SBP raises interest rate to 20pc, highest in Asia.

ISLAMABAD -- The State Bank of PaAkistan (SBP) in an exApected move has inAcreased the interest rate by three percent to 20 percent in orAder to fulfil the priAor actions of the InAternational Monetary Fund (IMF) for revivAing the much needed loan programme.

The Monetary PoliAcy Committee (MPC) of the SBP decided to inAcrease the policy rate to 20 percent, the highAest level since October 1996 in an attempt to "anchor inflation expecAtations as it is critical and warrants a strong policy response'. This was one of the prior actions of the IMF for revival of loan programme for Pakistan.

During the last meeting in January, the Committee had highlighted near-term risks to the inflation outlook from external and fiscal adjustments. Most of these risks have materialized and are partially reflected in the inflation outAturns for February. The national CPI inAflation has surged to 31.5 percent y/y, while core inflation rose to 17.1 percent in urban and 21.5 percent in rural basAket in February 2023.

The MPC noted that the recent fisAcal adjustments and exchange rate deApreciation have led to a significant deAterioration in the near-term inflation outlook and a further upward drift in inAflation expectations, as reflected in the latest wave of surveys. The Committee expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace. The avAerage inflation this year is now expectAed in the range of 27-29 percent against the November 2022 projection of 21-23 percent. In this context, the MPC emAphasized that anchoring inflation expecAtations is critical and warrants a strong policy response.

On the external side, the MPC noted that despite a substantial reduction in the current account deficit (CAD), vulAnerabilities continue to persist. In JanAuary 2023, the CAD fell to $242 million, the lowest level since March 2021. CuAmulatively, the CAD - at $3.8 billion in Jul-Jan FY23 - is down 67 percent comApared to the same period last year. NotAwithstanding this improvement, schedAuled debt repayments and a decline in financial inflows amid rising global inAterest rates and...