Karachi(July 14, 2018): The State Bank of Pakistan (SBP) has increased the key interest rate by 100 basis points to 7.5% for the next two months, as inflationary pressure along with the current account deficit takes a toll on Pakistan’s economy.
The interest rate hike is the third in 2018 after the SBP increased it by 25 basis points in January, and another half a percentage point in May. Cumulatively, the SBP has revised up the rate by 175 basis points since January 2018.
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In the monetary policy announcement on Saturday, SBP Governor Tariq Bajwa said Pakistan faces near-term challenges, a reference to the current account and trade deficits that have eroded the country’s foreign exchange reserves. “In the medium to long-term, the economy will remain on track,” said Bajwa.
The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools the central bank uses to ensure price stability in the economy.
Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy. The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.