The State Bank of Pakistan (SBP) has raised the key policy rate by 100 basis points to 22% after an emergency meeting. The central bank cited two developments that have worsened the inflation outlook and increased pressure on the external account. Firstly, there have been revisions in taxes, duties, and PDL rate in the FY24 budget approved by the National Assembly. Secondly, the SBP withdrew its general guidance for commercial banks on prioritizing imports. These measures are seen as necessary for completing the ongoing IMF program but have increased inflation risks. The additional taxes may directly and indirectly contribute to inflation, while import relaxation could pressure the foreign exchange market, leading to higher exchange rates. In response to these developments, the Monetary Policy Committee (MPC) decided to raise the policy rate to keep real interest rates positive and anchor inflation expectations. This move aims to bring down inflation towards the medium-term target of 5-7% by the end of FY25. The MPC believes that this decision, along with the completion of the IMF program and the government’s commitment to generating a primary surplus in FY24, will address external sector vulnerabilities and reduce economic uncertainty.
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