SBP likely to keep interest rate unchanged today

• SBP's Monetary Policy Committee will meet today.
• MPC will review current state of economy.
• Policy rate is currently at a record high of 21%.

The State Bank of Pakistan (SBP) is highly expected to maintain the benchmark interest rate at 21% through its monetary policy statement (MPS) to be announced today (Monday).

The Monetary Policy Committee — which is empowered to take a decision keeping in view the macroeconomic fundamentals — is highly likely to maintain the interest rate despite the fact that inflation has remained elevated.

To recall, in its last announcement in April, the MPC — established under the SBP's Amendment Act — increased the benchmark policy rate by another 100 basis points (bps) to 21%, a record high. 

The central bank defended its decision by terming it a key to ensure price stability, saying it was also an important step towards anchoring inflation to the medium-term target.

According to a survey conducted by Arif Habib Limited, 77.3% of respondents — belonging to various sectors, including financial and non-financial services — believe that the policy rate will remain unchanged at 21%.

Meanwhile, a small number of respondents — 22.7% — were of the view that the central bank would increase the policy rate by 100bps.

It should be noted that the primary objective of the increase in policy rate is to discourage private-sector borrowing because any increase in currency in circulation pushes inflation higher.

Pakistan’s key rate has been raised by a massive 1,125 basis points (bps) since April 2022. Most analysts agree and believe that with inflation peaking and global commodity prices coming down, there was no urgent need to hike interest rates yet again.

"They'll point to a 'plateauing of inflation' as evidence that rates don’t need to go up," Uzair Younus, Director of the Pakistan Initiative at the Atlantic Council's South Asia Center told Reuters.

Inflation surged to 37.97% in May, a record high for the second month in a row, and the highest in South Asia, ahead of Sri Lanka, which posted annual inflation of 25.2% in May.

But Shivaan Tandon, an economist at Capital Economics, expects a 100bps hike, saying the central bank cannot afford the luxury of keeping the policy rate on hold given the need to tame record-high inflation and support the currency through monetary tightening.

"Rate hikes may also prove to be a signal to potential creditors about the authorities’ commitment towards resolving external imbalances," he said.

— Addition input from Reuters