The State Bank of Pakistan (SBP) is expected to raise its policy rate by a significant 100-200 basis points in light of the country’s economic situation and historically high inflation reading. Financial analysts anticipate the Monetary Policy Committee to increase its key policy rate to 21-22 per cent at the review today (April 4) to curb inflation. This decision is expected to discourage private-sector borrowing since an increase in currency in circulation can drive inflation up.
In March, the central bank raised its key rate by a massive 300 basis points to a record-high level of 20 per cent, surpassing market expectations to meet the International Monetary Fund’s requirements for the release of its pending bailout funds. The country recorded historic high inflation at 35.4 per cent in March on an annualized basis, with core inflation, excluding energy and food prices, increasing to 18.6 per cent in urban areas and 23.1 per cent in rural areas.
The market’s reaction to surging inflation is evident from the recent rise in bond market rates driven by investors’ bullish outlook. According to a survey conducted by Arif Habib Limited, 57.7 per cent of respondents expect the policy rate to increase. Of these respondents, 30.8 per cent are predicting a rate hike of 100bps and 26.9 per cent foreseeing a rate hike of 200 bps. Meanwhile, 42.3 per cent of respondents believe that the policy rate will remain unchanged at 20 per cent.
The expected increase in the policy rate will make bank financing even more expensive, reduce demand for foreign financing for imports, and help address the fast decline in foreign exchange reserves, which have dropped to critically low levels at $4.2 billion. The cash-strapped country is undertaking key measures to secure IMF funding, including raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. While the government expects a deal with the IMF soon, media reports suggest that the agency expects the policy rate to be increased.
Initially, the MPC meeting was scheduled for April 27, according to the six-month advance calendar issued by the central bank in December 2022. However, the SBP called an off-cycle review last month and brought forward the April meeting. The revival of the IMF loan program will help attract $3-4 billion from multilateral and bilateral creditors, including the IMF, and stabilize foreign exchange reserves over the short term.