SBP hikes interest rate to 25-year high

KARACHI: The State Bank of Pakistan (SBP) on Monday increased the benchmark interest rate by 100 basis points to 17 per cent — the highest since October 1997 – “to anchor inflation expectations”.

The latest move takes the total interest rate increase to 750bps since January 2022.The Monetary Policy Committee (MPC) had observed “inflationary pressures are persisting and continue to be broad-based”, said SBP Governor Jameel Ahmad, in his maiden monetary policy press conference after assuming charge in August.

He added: “If these remain unchecked, they could feed into higher inflation expectations over a longer than-anticipated period, therefore, the Monetary Policy Committee stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.”

The MPC decided to increase key rate due to three important economic developments: inflation; external sector challenges; and global economic conditions.

Explaining each of these factors individually, the governor said despite some moderation in November and December, inflation continues to remain elevated. He said core inflation had been on a rising trend for the past 10 months. Moreover, he added, near-term challenges for external sector had increased despite the policy-induced contraction in the current account deficit. “The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves,” he said. The MPC also for their lack of support in opening LCs. In the statement, the central bank mentioned the business community, including various trade bodies and chambers of commerce, had highlighted that a large number of shipping containers carrying imported goods were stuck up at the ports, due to delays in the release of the shipping documents by the banks.

The SBP also advised banks to provide one-time facilitation to all those importers who could either extend their payment terms to 180 days (or beyond) or arrange funds from abroad to settle their pending import payments.

“Accordingly, till March 31, banks have been advised to process and release documents of shipments/ goods that have already arrived at a port in Pakistan or have been shipped on or before January 18,” the statement read.

Furthermore, banks have been advised to educate their customers to inform them prior to the initiation of any import transaction for avoiding any complications in the future.