Pakistan raises benchmark interest rate to 21 pc

Islamabad [Pakistan], April 7 : Amid the ongoing inflationary crisis in pakistan, the State Bank of Pakistan (SBP) has increased the benchmark interest rate by 100 basis points (bps) to 21 per cent, according to Pakistan Today.

Notably, this is the highest-ever level that has been recorded.

The Bank believed that this hike will reduce inflation but doing it by revising the interest rate does not seem to be working.

At the beginning of the financial year, in June 2023, the benchmark rate was 13.75 per cent. So far, it has been raised by 7.25 per cent by the MPC, without inflation slowing down. If anything, as the March figures indicate, it is speeding up. Part of the problem is that inflation is an intractable beast.

Apart from failing to tame inflation, the rupee's value has not been defended. It has now slipped to Rs 290 per dollar, with the psychological limit of 300 not that far ahead, as per the report in Pakistan Today.

After the announcement, the business community did not respond well as the prevailing sentiment is that this strategy does not really work when it comes to controlling inflation and that this is a governance and regulatory failure on part of the government, according to The Nation.

The argument is that the interest rate has risen by 1123bps in the last 14 months, but the impact on reigning in inflation has been negligible and has only contributed to the slowing down of the economy.

This move will also not buffer the value of the rupee due to the politically turbulent climate, and it will raise the cost of borrowing for the formal sector already suffering from low capacity utilisation due to an import crunch. In relation to this, it is important to point out that both the World Bank and Asian Development Bank (ADB) have announced growth projections between 0.4 and 0.6 per cent for Fiscal Year 23, reported The Nation.

The Nation also reported that the hike was expected, considering that inflation in March 2023 rose further to 35.4 per cent and is expected to remain high in the near term and the hope is that the rate hike will help with anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability.

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