ISLAMABAD – The central bank has hiked the policy rate by 50 basis pointsto 6.50 percent for the next two months, according to the statement issuedby State Bank of Pakistan (SBP).

This is the second time, the central bank made an upward revision in therates. In January 28, the policy rate was increased by 25 bps to 6%, upfrom 5.75%—the constant policy rate retained for record twenty months.

According to the Monetary Policy Committee, the decision to hike policyrate was influenced by the deteriorated situation of the balance ofpayments, ballooning fiscal deficit, and consistent pressure on inflation.

It said the balance-of-risks to the sustainability of thehealthy-growth-low-inflation nexus have shifted due to the followingreasons.——————————

First, the balance-of-payments, despite an increase in exports and somedeceleration in imports, has further deteriorated due to a sharp increasein international oil prices and limited financial inflows to date.

The current account deficit widened to US$ 14.0 billion during the firstten months of FY18, which is 1.5 times the level of deficit realized duringthe same period last year.

Despite a strong recovery in exports (YoY increase of 13.3 percent duringJul-Apr FY18) and a moderate increase in workers’ remittances (YoY growthof 3.9 percent), the growing imports to support higher economic activityand the sharp increase in oil prices have pushed the current accountdeficit to a higher level. In the absence of sufficient projected financialflows, a portion of this higher current account deficit was managed byusing country’s own resources during FY18.

Second, the revised estimate for fiscal deficit stands at 5.5 percent ofGDP as compared to the initial target of 4.1 percent for FY18, reflecting asignificantly higher level of fiscal expansion than previously anticipated.These twin deficits, depicting the elevated aggregate demand in thecountry, are adversely affecting the near-term macroeconomic stability.