While the government strives to comply with the requirements of a $6.5 billion bailout from the International Monetary Fund, the State Bank of Pakistan (SBP) will forward the date of its Monetary Policy Committee meeting to March 2nd, 2023 and increase the policy rate to counteract negative macroeconomic (IMF).
Originally slated for March 16, the market review will now take place two weeks earlier and is expected to result in a policy rate increase of at least 100-200 basis points, or around 18-19 percent.
Remember that the SBP initially raised the benchmark policy rate to 17 percent in January 2023, which was the highest level in more than 20 years. The central bank of Pakistan is anticipated to increase interest rates, which is viewed as a requirement for resuming the country’s loan programme with the IMF, according to last week’s bond sale in Pakistan. Economists anticipate a 150–250 basis point rate increase.
Since the last monetary policy meeting, a number of economic developments have occurred. The federal government has improved revenue collection in response to IMF expectations. The government has increased the price of gas and petroleum goods, in addition to raising the sales tax to 18%.
Importantly, the increase in food and energy prices has kept headline inflation in the double digits since November 2021. This phenomena is still present, with headline figures reaching new highs under pressure from rising food and commodity prices as well as expensive lending rates in secondary markets.
The MPC will take into account several other economic events, such as those on the money market, which will be a crucial factor in the policy decision, in addition to the inflation trajectory.
A key component of achieving the medium-term inflation target, according to the committee’s prior policy statement, is anchoring inflation expectations, which calls for coordinated monetary and fiscal policy actions.
Today, with the long-awaited staff-level agreement for the 9th review of the Extended Fund Facility (EFF) still pending, the IMF is demanding extra monetary tightening to keep inflation under control.
Treasury bill auction rates have already risen to 19.95 percent in the previous auction, and yields in all three tenors are at their highest levels since June 1998. It is only natural, and prudent, for the central bank to call an early market review to offset losses as a result of this.