KARACHI: Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) jacked up key policy rate by 100 basis points system (bps) to 16 percent, it was announced yesterday. State Bank in a statement issued after meeting said that this decision reflects MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.

“Decision is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving way for higher growth on more sustainable basis,” MPC said. SBP noted that amid ongoing economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs. “In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth,” statement read, adding that consequently rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.

MPC further noted that short-term costs of bringing inflation down are lower than long-term costs of allowing it to become entrenched. Meanwhile, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains high priority. Headline inflation increased sharply in October, food prices also accelerated significantly and core inflation has risen further. A sharp decline in imports led to significant moderation in current account deficit in both September and October. MPC said that it will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth. Energy and food prices rose by 35.2 percent and 35.7 percent year-on-year, respectively. Meanwhile, core inflation increased further to 18.2 percent and 14.9 percent year-on-year in rural and urban areas respectively, as rising food and energy inflation seeped into broader prices, wages and inflation expectations.

Moreover, it was noted that in line with slowdown in economic activity, private sector credit continued to moderate, increasing only by Rs 86.2 billion during first quarter of fiscal year 2022-23 compared to Rs 226.4 billion during same period last year. Central bank attributed this deceleration to significant decline in working capital loans to wholesale and retail trade services as well as to textile sector in wake of lower domestic cotton output and slowdown in consumer finance. 

Published in The Daily National Courier, November, 26 2022

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