The State Bank of Pakistan (SBP) has raised the interest rate by 100 basis points to an eight-year high of 13.25% over apprehensions of increase in inflation, especially in the first half (July-December) of the current fiscal year 2019-20.
The inflation is expected to accelerate due to recent rupee depreciation against the US dollar and the hike in gas prices. Moreover, a possible increase in electricity tariff next month and the impact of measures taken in the budget FY20 to boost tax collection could also fuel inflationary pressure, according to English daily Express Tribune.
“The inflationary pressure is expected to recede in second half of the fiscal year,” SBP Governor Reza Baqir told a news conference in the port city of Karachion Tuesday.
He said that the worst in the economy would be over in the first half and that it would gear up to return to the good days from the second half (January-June 2020).
The projected the economic growth rate at is slightly higher than the nine-year low of 3.3% recorded in the preceding fiscal year 2018-19. “SBP expects the real GDP (gross domestic product) growth of around 3.5% in FY20,” he said.
He said that bulk of the needed adjustments in rupee-dollar exchange rate and key interest rate are seemed done. However, emergence of unforeseen factors in the future may make the central bank to adjust its fiscal and monetary policies, accordingly.
“The bulk of the needed adjustment in the real effective exchange rate to address the past overhang of overvaluation has been completed with the recent deprecation of the exchange rate,” Baqir said. “While the exchange rate is flexible and market determined the SBP stands ready to take action to address disorderly market conditions in the foreign exchange market.”
“On the other hand, a greater than expected softening in domestic demand and downward revision in projected inflation would provide grounds for easing monetary conditions,” the SBP governor said.
The central bank has increased the key interest rate by 7.5% since January 2018. Baqir said that the rate hike will benefit people, who have parked savings in saving accounts at banks and/or in national savings schemes. “The interest rate hike will help control dollarisation in the economy. People will prefer to keep savings in rupee rather than in dollars.”
The SBP Governor said that the monetary policy committee expects average inflation at 11–12% in FY20 – higher than the previous projection. “Nevertheless, inflation is expected to fall considerably in FY21 as the one-off effect of some of the causes of the recent rise in inflation diminishes,” he said. “The government has also committed to cease borrowing from the State Bank that would qualitatively improve the inflation outlook,” he said.