KARACHI: In line with market expectations, the State Bank of Pakistan (SBP) raised the key interest rate by 100 basis points to 13.25%, on likely pickup in inflation in the near future.
The announcement was made by SBP Governor Reza Baqir at a press conference on Tuesday.
He said that the inflation forecast has been revised up to 11-12% for the current fiscal year 2019-20, however, it is expected to improve in fiscal year 2020-21.
The governor said that the central bank would consider revising down the interest rate if demand softened more, and inflation eased.
“The rate hike will benefit people who have parked savings in saving accounts at banks and/or in national saving schemes,” he said.
“The interest rate hike will help control dollarisation in the economy. People will prefer to keep savings in rupee rather than in dollars.”
The monetary policy committee at the central bank tightened the policy keeping in view the rising inflationary pressure due to rupee depreciation, potential increase in utility tariffs and an upward trend in prices of petroleum products and essential food items in the world markets. The central bank has increased the key interest rate by 7.5% since May 2018 to 13.25%.
A day earlier, some analysts had predicted a 100 basis points increase in the key interest rate. Out of 12 analysts, eight had expected the policy rate to rise by 100bps. Among the remaining four, two expected an increase of 50 basis points and the other two anticipated an increase of 75bps
The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the inter-bank market. It is one of the tools the central bank uses to ensure price stability in the economy.
Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy. The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.