State Bank Set To Increase Interest Rate To Stave Off Inflation

State Bank Set To Increase Interest Rate To Stave Off Inflation
The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) is set to meet on Monday, January 23, 2023, to decide the policy rate for the coming months.

Experts are expecting a rate hike in the range of 1-2 percent given unprecedented inflationary pressure, which is only going to escalate further in the wake of the now widely anticipated rupee devaluation and gas price hikes to reduce mounting circular debt.


An interest rate hike can also be linked to the multiple conditionalities for the resumption of the IMF program.

As per an article published by the IMF, “While there are many different interest rates in financial markets, the policy interest rate set by a country’s central bank provides the key benchmark for borrowing costs in the country’s economy. Central banks vary the policy rate in response to changes in the economic cycle and to steer the country’s economy by influencing many different (mainly short-term) interest rates. Higher policy rates provide incentives for saving, while lower rates motivate consumption and reduce the cost of business investment.

“A guidepost for central bankers in setting the policy rate is the concept of the neutral rate of interest: the long-term interest rate that is consistent with stable inflation. The neutral interest rate neither stimulates nor restrains economic growth. When interest rates are lower than the neutral rate, monetary policy is expansionary, and when they are higher, it is contractionary,” the report states.

The need for a contractionary monetary policy in Pakistan stems from the fact that the country is facing high inflation that has been propelled by floods last year. The government is aiming to curb the fiscal deficit by curtailing demand.

(Read more: A Period Of Low Growth Awaits Pakistan As It Tries To Fend Off Inflation And External Shocks)

The IMF press release on reaching a staff-level agreement with Pakistan back in July 2022 said, headline inflation exceeded 20 percent in June last year, hurting particularly the most vulnerable. “In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent.”
The real interest rate is negative (below the inflation rate) and only Sri Lanka, in the region, has a wider gap between policy rate and prevailing inflation rate at the moment.

However, experts have doubts about the efficacy of the contractionary measures in tackling inflationary pressures as Pakistan is facing a wave of primarily cost-push inflation driven by relatively inelastic imports of fuel and food items.

“Pakistan does not have a demand problem. It has today and in the past been plagued by systemic supply-side issues. Whether that was a dilapidated energy chain, narrow revenue base, limited human resources or low productivity. Restricting imports, capital controls or pushing the economy into a recession was never going to be more than a short-term Hail Mary. Time has almost run out,” writes Mustafa O. Pasha, Chief Investment Officer at Lakson Investments, in an article for Business Recorder.

Currently, the real interest rate is negative (below the inflation rate) and in the region, only Sri Lanka has a wider gap between the policy rate and the prevailing inflation rate at the moment.

The IMF press release issued in July 2022 suggested, “to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate.”

Following the guidelines, the SBP has already increased the markup rate for these refinancing schemes by 2 percent, a few weeks back. More recently, the government has also raised the markup on Naya Pakistan certificates to attract foreign investments.

Given the prevailing macroeconomic instability and the challenging times ahead, the SBP has its work cut out for the next 12 months.

“Cumulatively, the policy rate was raised by 675 bps during FY22. At the same time, the SBP increased the frequency of monetary policy committee meetings from six to eight times a year, with a view to making the process of monetary policy formulation more responsive to the fast-changing situation,” read the SBP annual report 2022.


The writer is a Business and Economy Journalist for TFT and also works as a Financial Analyst. He can be reached at