Pakistan's central bank hikes policy rate to 24-year high of 17% to battle inflation, food shortage

Pakistan's central bank on Monday increased the policy rate by 100 basis points to 17 per cent as the country continues to witness decades-high inflation and the worst food shortage. With this raise, the interest rate in Pakistan is now at a 24-year high. 

The State Bank of Pakistan's Monetary Policy Committee noted that inflationary pressures were persisting and continuing to be broad-based. "If these remain unchecked, they could feed into higher inflation expectations over a longer than-anticipated period," it said, adding that it was critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.

Pakistan is in the middle of an economic crisis as inflation has soared and its forex reserves have depleted to a point where it can serve only three weeks of imports. Pakistan recorded 24.5 per cent inflation in December, higher from 23.8 per cent in November.

Recently, Pakistan faced a massive shortage of flour and the common people were forced to line up for hours to get subsidised atta as prices otherwise had shot up.    

Core inflation has been on a rising trend for the past 10 months and surveys suggest consumer and business inflation are expected to go up. 

The central bank said that near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit. "The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves," it said.

The monetary policy statement further noted that the global economic and financial conditions broadly remain uncertain in the near-to-short term, leading to mixed implications for the Pakistan economy.

"The expected slowdown in global demand could negatively impact the outlook of exports and workers’ remittances for emerging economies, including Pakistan," the statement said.

The committee said that the national CPI inflation remained at elevated levels despite some moderation in recent months. Compared to 26.6 per cent year-on-year in October, the headline inflation slightly eased to 23.8 per cent in November and 24.5 per cent in December 2022.

An increase in food inflation remains the major contributor to this persistence in inflation, it said. The core inflation also rose due to increasing core goods prices, especially durables. The downward adjustment in fuel prices and reduction in fuel cost charges slightly muted the energy inflation in recent months.