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Monetary policy: SBP to hold MPC meeting on November 19

Interest rate likely to go up to meet IMF requirements

SAMAA | - Posted: Nov 17, 2021 | Last Updated: 2 months ago
Posted: Nov 17, 2021 | Last Updated: 2 months ago

The State Bank of Pakistan has decided to move up the meeting of the Monetary Policy Committee (MPC) to address the “unforeseen developments” that have impacted the inflation and balance of payments.

The Pakistani currency fell to a record low of Rs175.73 against the US dollar on November 12.

“The MPC meeting would now be held on November 19 instead of the previously announced date of November 26,” the central bank tweeted.

The economic experts and analysts are speculating about the increased interest rate following the announcement.

According to the press release, the meeting has been brought forward in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments, and to help reduce the uncertainty about monetary settings prevailing in the market.

Earlier, PM’s aide on Finance and Revenue Shaukat Tarin said that the IMF has set five preconditions for the resumption of the loan program. He, however, did not mention raising interest rates.

The experts have forecasted an increase of 75 to 100 basis points in the interest rate.

Following the meeting announcement, a survey was conducted by Topline Securities asked people what change do they expect in the interest rate expected after the MPC meeting.

25 percent of the respondents expect the interest rate to be increased by more than 75 basis points, while 30% expect 75 basis points. The remaining 45 percent of participants think that the policy rate will increase by 50 basis points.

Interest rate by the end of the financial year

In response to another question, 11% of the participants held the opinion that the policy rate will surpass 150 basis points, while 50% of the respondents marked the increase of 150 basis points and 11% expected it to increase by 100 basis points only.

Dollar projection

The survey also asked about the Pakistani rupee performance against the US dollar. It gained mixed responses from the participants where 33 percent of the respondents picked options of Rs175 to Rs180 and another 33% chose Rs180 to Rs185.

While 22% of the participants think that the value of the US dollar will be under Rs175 by the end of the year.

According to Arif Habib Securities, the current policy rate in Pakistan is 7.25% but the inflation rate is as high as 9.25%. This means that the interest rate in Pakistan is 1.95% less than what it should be.

But Pakistan is not the only country where this phenomenon exists.

The difference between interest rate and inflation in the USA is 5.95%. In Canada, this is 4.15%.

The difference between the rates in other countries are:
– Turkey 3.89%
– UK 3%
– Australia 2.90%
– Sri Lanka 2.60%
– Singapore 2.43%
– Oman 1.96%

The SBP is taking a number of measures to control the damage emerging out of increased inflation and galloping current account deficit. In a recent move, the central bank increased the Cash Reserve Requirement for the banks from 5% to 6%. It was aimed at curtailing the supply of liquidity that may bring down the import, force the banks to increase deposits, and liquidate their dollar holdings.

In the previous monetary policy, the SBP expected that the current account deficit would remain in between two to three percent of the GDP but the first quarter deficit exceeded the annual target to reach 4.1% of GDP.

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