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Pakistan increases policy rate by 100 basis points to 21%

The State Bank of Pakistan (SBP) has increased the policy rate by 100 basis points to 21 per cent to contain inflation, the central bank said in a statement.

The monetary policy committee (MPC) of the bank noted that inflation in March 2023 rose to 35.4 per cent, and is expected to remain high in the near term, the statement added on Tuesday.

“The MPC views today’s decision as an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability,” said the SBP.

The committee further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate, it added.

Earlier in March, the SBP increased the interest rate by 300 basis points to 20 per cent, and according to Tuesday’s statement, the current account deficit has narrowed considerably since then, Xinhua news agency reported.

The overall balance of payments position continued to remain under stress, with foreign exchange reserves still at low levels since March.

The recent strains in the global banking system have led to further tightening of global liquidity and financial conditions, the statement said, adding that all these factors have added to the difficulties of emerging market economies like Pakistan to access international capital markets, the statement said.

“In this context, the MPC considers the current monetary policy stance appropriate, and stresses that decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next eight quarters,” the statement added.

However, the committee noted that uncertainties attached to the global financial conditions as well as the domestic political situation pose risks to this assessment.

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