In an effort to rein in spiraling inflation, the State Bank of Pakistan (SBP) raised its benchmark policy rate by 150 basis points to 8.75 percent on Friday.
The Monetary Policy Committee (MPC) voted to raise the policy rate by 150 basis points to 8.74 percent at its meeting on Friday. This reflected the MPC's assessment that risks relating to inflation and the balance of payments have grown since the previous meeting, while the outlook for growth has improved.
Both global and domestic variables contribute to the increased risks associated with inflation and the balance of payments. Price pressures from Covid-induced supply chain disruptions and increasing energy prices are proving to be greater and longer-lasting than previously predicted around the world. As a result, central banks have begun to tighten monetary policy in order to keep inflation expectations stable. High import costs have also led to higher-than-expected CPI, SPI, and core inflation outcomes in Pakistan
At the same time, signals of demand-side inflation are appearing, and corporate inflation expectations have risen as a result of increased upside risks from domestic administered prices.
In terms of the balance of payments, the current account deficits in September and October were higher than expected, owing to increased oil and commodity prices as well as strong domestic demand. The rupee has borne the brunt of the burden of responding to these foreign pressures.
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