The State Bank of Pakistan has announced to set the interest rate at 22 percent after an emergency meeting in view of rising inflation.
According to the State Bank of Pakistan, an emergency monetary policy meeting was held, in which the policy rate was increased by 100 basis points.
The statement said that monetary policymakers believe that inflationary risks are mainly due to the implementation of new measures in the fiscal and external sectors.
The committee believes that interest rate hikes will help moderate inflation by the end of fiscal 2025.
According to the State Bank statement, to meet the IMF conditions, the measures and import ban in the budget 2023-24 have been lifted, while the increase in PDL and other tax measures in the budget will cause an increase in inflation.
According to the declaration, the priority areas in the supply of foreign exchange for imports are that the removal of the condition will increase inflation and pressure on the exchange rate, increase in PDL and removal of restrictions on imports are necessary for the completion of the IMF program.
According to the State Bank, completion of the IMF program by increasing interest rates will help meet the primary surplus target in 2023-24.
The decision to increase the monetary policy will help to overcome the weaknesses of the external sector and reduce the economic uncertainty.
The rate of interest has been continuously increased by government often. This has shattered the investors confidence a lot. The stock market does not respond positively on interest rates hikes. Though government gets lot of funds as liquid money is deposited in the banks for getting better returns.
Higher interest rates can make currency rates in Pakistan more attractive to foreign investors seeking higher returns on their investments. This increased demand for the currency can lead to an appreciation in its value relative to other currencies. While this can make imports cheaper, it can also make exports more expensive, potentially affecting trade balances.
Though government is trying its best to improve its foreign exchange reserves as they are at their lowest level. Foreign remittances are going down each day and people working abroad have reduced sending their money to Pakistan.