In the statement after its meeting on 12th June, the Monetary Policy Committee (MPC) viewed the then monetary policy stance as appropriate to achieve the price stability objective “barring any unexpected domestic and external shocks.” The MPC noted that this outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”

The Committee, however, has noted two important domestic developments since the last meeting that have slightly deteriorated the inflation outlook and which could potentially increase pressure on the already stressed external account. First, there are certain upward revisions in taxes, duties and PDL rates in FY24 budget, as approved by the National Assembly on June 25. Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritising imports. While the MPC views these measures as necessary in the context of completing the ongoing IMF program, they have increased the upside risks to the inflation outlook. The Committee views that additional tax measures are likely to directly and indirectly contribute to inflation, while the relaxation in imports may exert pressures in the foreign exchange market. The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices.

With this background, the MPC convened an emergency meeting to respond to these developments. The MPC decided to raise the policy rate by 100 bps to 22 per cent, effective 27th June 2023. The MPC views this action as necessary to keep the real interest rate firmly in the positive territory on a forward-looking basis. This would help further anchor inflation expectations, which have already been moderating over the last few months, and support lowering inflation towards the medium-term target of 5 – 7 per cent by the end of FY25, barring any unforeseen developments.

The MPC views that today’s decision – along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty. The Committee reiterated that it would continue to monitor evolving economic developments carefully and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term.