KARACHI: The State Bank of Pakistan (SBP) on Monday increased the benchmark interest rate by 25 basis points to 7.25% for the next two months.
A small number of experts expected the central bank to surprise the market by hiking the rate while considering the vulnerabilities in current account balance, uptrend in weekly sensitive price index and resumption of the International Monetary Fund’s (IMF) loan programme.
The SBP hinted in monetary policy statement for July that it might maintain the rate at the current level of 7% until the economy recovers from Covid-19 pandemic.
It is pertinent to mention that inflation remains elevated and real interest rate stands at a negative 1-1.25% at present.
The inflation reading for August surged close to 8.4% which fell within the central bank’s projection of 7-9% inflation for the year.
Earlier, due to the lockdown imposed to contain the spread of Covid-19 in the country, the SBP had aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%.
The monetary policy is an effective tool with the central bank that is used to curb inflation. The SBP announces a target rate every two months, which serves as the benchmark for overnight funds in the interbank market.
The policy rate is revised up or down or kept unchanged in relation to the inflation reading and economic activities. Low inflation leads to a reduction in the policy rate in a bid to ramp up economic activities and vice versa.
