Federal Budget

SBP keeps interest rate unchanged, inflation at 38pc

SBP keeps interest rate unchanged, inflation at 38pc

Business

Previously it was increased by 100bps to 21pc

KARACHI (Dunya News) – State Bank of Pakistan (SBP) on Monday announced the monetary policy with the policy rate unchanged at 21 per cent amid the record-high inflation in the country – a trend resisted by the business community and the market experts expecting no further increase.

In this connection, the SBP’s Monetary Policy Committee (MPC) met before making any decision on the subject while reviewing the overall financial position of the country, economic indicators as well as performance of different internal and external sectors.

Previously, the MPC had met on April 4, which resulted in a 100 basis points (bps) increase in the key policy rate from 20pc to 21pc – a move described as an important step towards anchoring inflation expectations around the medium-term target, which was critical for achieving the objective of price stability.

Although the monetary policy is revised with every two months, but the last MPC meeting was held just a month after the SBP on March 2 opted to a 300bps raise in the key policy rate from the previous level of 17pc to 20pc.

The SBP, which is now totally independent of the government after made a fully autonomous entity through a legislation passed by the PTI government, has been following the guidelines and conditions set by the International Monetary Fund (IMF).

Read more: IMF presses Pakistan for tightening monetary policy

But the business community repeatedly rejected any increase in the benchmark policy rate and questioned the government's approach towards controlling inflation.

They argue that on the one hand the strategy has previously failed to produce desired results and, on the other, it decelerated economic activities in the country.

Read more: Business community outright rejects 100bps hike in interest rate

Asking the SBP to change the course of action, they say an increase in key policy rate raises the cost of borrowing for the formal sector already suffering from low capacity utilisation due to an import crunch.

It is not just the businessmen as Finance Minister Ishaq Dar too stands for low interest rate and a strong rupee. That’s why he said at the time joining the cabinet in September last year that he would work to rein in inflation while cutting interest rates, saying the rupee currency was undervalued and promising a strong response to the South Asian nation's worst economic crisis.

"We will bring interest rates down," he said at that time. "Our currency right now is not at the place where it should be, it is undervalued," said Dar, who is known to favour currency market intervention to keep the rupee stable.