KARACHI: The State Bank of Pakistan lifted the benchmark interest rate by 100 basis points to 9.75 percent on Tuesday, in line with market estimates for the next month.
Due to increasing imports and trade and current account deficits, the market had expected a sharp increase in the interest rate. The rise is intended to put a halt to the rapidly rising inflation rate.
The November inflation rate jumped to 11.5 percent, much exceeding the central bank’s forecast of 7-9 percent inflation for the year.
It’s worth noting that the real interest rate (the benchmark rate less the inflation rate) is still negative.
Furthermore, commercial banks are demanding unusually high yields (rates of return) on government securities like as T-bills and Pakistan Investment Bonds (PIBs).
The State Bank of Pakistan said on November 19 that it would raise the number of annual monetary policy meetings from six to eight.
On January 24, 2022, the next monetary policy will be unveiled.
The SBP has aggressively lowered the benchmark interest rate by 625 basis points to 7% from March to June 2020 due to the lockdown enforced to contain the spread of Covid-19 in the country. After the economy began to show indications of overheating, the central bank hiked it to 8.75 percent.
The central bank’s monetary policy is an effective instrument for reducing inflation. Every two months, the SBP releases a target rate, which serves as a benchmark for overnight financing in the interbank market.
