<p>Design: Hussain Afzal</p>

Design: Hussain Afzal

Interest rate in 2022: climbing the hill as Pakistan's macroeconomic concerns bite

  • Policy rate rose from 9.75% in January to a multi-decade high of 16% in November
Updated 29 Dec, 2022 12:02am

The year 2022 was a tough one for Pakistan’s economy on many fronts. A change in the government, persistent talks of default, delays in the International Monetary Fund (IMF) programme, and currency volatility were just a few themes. At the end of the year, economic distress also became a focus.

In the midst of these developments, inflation skyrocketed to over 20% and macroeconomic cues weakened. This prompted the State Bank of Pakistan (SBP) to resort to tools available at its disposal including hiking the interest rate.

The outgoing year saw the policy rate fluctuate in a wide range to ultimately rise to its highest level since 1998-99. The central bank held eight Monetary Policy Committee (MPC) meetings in the 12-month period with one of them being an emergency one — April 2022. Emergency meetings are rare, and its occurrence just conveys the gravity of the situation.

Uncertainty spiked when the political setup was about to change, and SBP's emergency meeting came just ahead of the no-confidence vote against Imran Khan, who was eventually ousted as prime minister just days later.

At the onset of 2022, the policy rate was 9.75% which was already criticised by the industrial and manufacturing sector.

In its first meeting of the year, held on January 24, the MPC announced to keep the policy rate unchanged as several developments suggested demand moderating measures were gaining traction and had improved the outlook for inflation.

The status quo in the interest rate extended to the second MPC meeting as well that was held on March 8, 2023. As per the SBP, the decision reflected the MPC’s view that the outlook for inflation had improved following the cuts in fuel prices and electricity tariffs announced by then prime minister Imran Khan at the end of February 2022.

However, the SBP flagged “significant uncertainty” about the future path of global energy and food prices due to the Russia-Ukraine conflict.

Imran then announced a cut of Rs10 per litre in fuel prices and Rs5 per unit decrease in the electricity rates as part of his relief package to the public. At the time, oil prices were about to hit the highest level in 2022.

Then, in the beginning of April 2022, the political landscape was abuzz with talks of “vote of no-confidence” which was registered by the Pakistan Democratic Movement (PDM). As a last resort move, Imran announced to dissolve assemblies and called fresh elections in the country.

The move was challenged by the then opposition in the Supreme Court of Pakistan and the apex court termed it “illegal”. Consequently, the National Assembly was restored that paved way for the vote of no-confidence and ousted Imran.

On April 11, 2022, the Shehbaz Sharif led government took charge and announced a steep surge in electricity and fuel prices that took inflation upward.

On May 3, the government of Pakistan decided against extending the contract of then SBP governor Dr Reza Baqir and Deputy Governor Dr Murtaza Syed was appointed acting governor until a new chief was appointed.

In its meeting on May 23, the SBP increased the interest rate by 150 basis points to 13.75% due to elevation of external pressures and worsening of inflation outlook.

It hoped that the move would help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.

The next meeting on July 7 saw the SBP prop up the interest rate by 125 basis points to 15%, which was the highest ever level since November 2008.

The increase was aimed at ensuring a soft landing of the economy amid an exceptionally challenging and uncertain global environment. The SBP hoped that it would also cool economic activity, prevent a de-anchoring of inflation expectations and provide support to the rupee in the wake of multi-year high inflation and record imports.

It is pertinent to mention that the inflation reading surpassed 20% in June 2022 and touched 24.9% in July. It attained a peak of 27.3% in August 2022.

On August 19, the government of Pakistan appointed Jameel Ahmad as SBP Governor.

The MPC announced to maintain the interest rate in its meeting on August 22 and “felt that it was prudent to take a pause at this stage.”

The SBP kept the interest rate unchanged once again in its meeting on October 10 as it “was of the view that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods.”

Against market expectations, the SBP hiked the policy rate 100 basis points on November 25 to 16%. This is the highest level since 1998-99.

As per the central bank, the inflationary pressures proved to be stronger and more persistent than expected. The decision was aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis.

Future outlook

Pak-Kuwait Investment Company Head of Research Samiullah Tariq told Business Recorder that he expected an increase of another 100 to 200 basis points in policy rate in 2023.

“This is because inflation continues to remain elevated while risks to external outlook persist,” he said.

Ismail Iqbal Securities Head of Research Fahad Rauf predicted status quo in interest rates in 2023.

“The SBP allotted a high amount of weightage to inflation in the past few meetings but other indicators are worsening,” he said. “Economic growth is expected to be lower than expectations, factories are closing and unemployment is rising. There is virtually no demand in the economy and any raise in the interest rate will prove futile for decreasing the demand because the slowdown in the economy is already achieved.”


On December 26, the announced the advance calendar of Monetary Policy Committee (MPC) meetings for the period between January and June 2023.

Monetary Policy Committee: SBP issues advance calendar for meetings in January-June 2023

According to it, the central bank has scheduled four meetings during the six-month period. The first meeting will be held on January 23 (Monday), 2023 while the second one will be held on March 16 (Thursday), 2023.

The third meeting is scheduled to be held on April 27 (Thursday), 2023 while the fourth is expected to take place on June 12 (Monday), 2023.

It remains to be seen where interest rates will go from here, but if one were to believe JPMorgan, they could touch the 20% level by the end of fiscal year 2023.

However, all that everyone in the economy wants is one key ingredient missing for many decades — stability in policy and governance.


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