In a major deviation from the market consensus, State Bank of Pakistan in its Monetary Policy Committee Meeting held on Friday, 19 November 2021 raised the Policy Rate by 150bps.

The majority consensus was of a 100bps increase, as SBP had previously guided the market of Gradual and Measured increase in Policy Rate. However, the drastic increase of 150bps came on feet of IMF pressure as IMF has asked Pakistan to bring its Interest Rates in Positive real territory i.e: higher then inflation.

Ocotber-2021 inflation of 9.2% had already hinted that Interest Rates will soon surpass that level and SBP took a bold measure to increase the rate by a larger quantum citing risks related to inflation and the balance of payments have increased.

In its Monetary Policy statement, SBP acknowledged that the balance of risks has shifted away from growth towards inflation and the current account faster than expected. Accordingly, the MPS was of the view that there is now a need to proceed faster to normalize monetary policy to counter inflationary pressures and preserve stability with growth. Looking ahead, the MPC re-iterated that the end goal of mildly positive real interest rates remain unchanged and expects to take measured steps to that end.

SBP further expects pressure on Rupee to subside after Monetary Measures taken by SBP comes into effect (policy rate, CRR Increase). SBP has highlighted that PKR Exchange rate has faced burden in terms of adjusting to the widening Current Account Deficit. Which will not be the case now.

The SBP has also revised upwards its forecast for FY22 Current Account Deficit and expects it to be between 2-3% of GDP.

However, keeping in view bumper agriculture output, SBP has kept its GDP Growth projections anchored at 5% for FY2022.

SBP maintained that its Inflation target remains at 7% to 9%, however, considerable risks persists for its upward revision.

In addition, SBP also revised its Monetary Policy Committee meeting schedule, which will now meet 8 times in half year instead of 6 times previously. The schedule is as follow:

  1. December MPC meeting: Tuesday, 14th Dec 2021
  2. January MPC meeting: Monday, 24th Jan 2022
  3. March MPC meeting: Tuesday, 8th Mar 2022
  4. April MPC meeting: Tuesday, 19th Apr 2022
  5. June MPC meeting: Friday, 10th Jun 2022

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