SBP hikes interest rate by 25 basis points to 10.25%

F.P. Report

ISLAMABAD: In contrast with market expectations, the State Bank of Pakistan (SBP) increased the benchmark interest rate by 25 basis points to 10.25% on Thursday for the next two months.

The central bank has increased the key interest rate in a bid to control the challenging fiscal deficit, SBP Governor Tariq Bajwa said at a press conference in Islamabad.

The central bank has increased the rate despite opposition from the government.
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.

Earlier, the bank was considering increasing the rate by 100 basis points, but the planning and finance ministries opposed further increase due to low inflation and slowing economy.

With the fresh revision, the central bank has raised the interest rate by a cumulative 4.5 percentage points in six rounds since January 2018.

The SBP governor said the current account deficit has started narrowing due to the previous rate hikes.

“However, the current account deficit still remains at an elevated level.”

The core inflation has remained comparatively high over 8% in December 2018, the governor added.