SBP may raise rates by 125 bps

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Remittances SBP

The State Bank of Pakistan (SBP) looks set to raise its key policy rate by 125 basis points at its review on tomorrow, as it attempts to tackle 13-year high inflation, according to the median estimate in a snap poll.

The economists, analysts and senior professors surveyed were widely split on the quantum of increase by the SBP, with views ranging from 50 to 200 basis points. Two respondents did not see a need for a rate increase.

The central bank raised the benchmark interest rate by 150 bps in May, taking the total increase to 400 bps so far this year to counter rising inflation.

Pakistan is wrestling with economic turmoil, a fall in reserves and a weakening currency. Data on Friday showed consumer prices in June soared to 21.3 per cent from a year earlier, largely on account of a 90pc spike in fuel prices since the end of May after the government scrapped costly fuel subsidies. With the current policy rate at 13.75pc and inflation running well above, real interest rates in the economy have turned sharply negative.

“The last monetary policy committee statement is proof that the State Bank of Pakistan is way behind the curve on anticipating inflation,” said Yousuf Nazar, an economist formerly with Citigroup, who writes for various publications.

“Another hike would increase government debt servicing costs as well as hurt industries. It is not going to have much of an impact on exchange rate or overall demand,” he added.

Most believed a hike was inevitable, given persistently high global energy prices, the abrupt ending of fuel subsidies as well as the need to control demand after SBP said in its last policy statement the economy had rebounded much more strongly than anticipated.

 

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