SBP increases liquidity reserve requirements for commercial banks

The State Bank of Pakistan has decided to increase the average cash reserve requirement from 1% to 6% for commercial banks in an effort to control rising inflation.

The central bank raised the cash reserve ratio of banks for the first time in 13 years in an effort to reduce excess liquidity in the banking system, which analysts say is contributing to the rise in prices.

The cash reserve requirement is the amount of money that banks are required to keep with the State Bank of Pakistan and applies to demand liabilities and term liabilities with a term of less than a year.

Term liabilities with a term of more than one year will continue to be exempt from maintenance of cash reserves.

The move will encourage banks to raise more long-term deposits, which will facilitate asset-liability matching and allow banks to extend long-term loans to finance construction and housing.

Inflation climbs to 9.2% in October

Inflation based on the Consumer Price Index hit a four-month high of 9.2% year-on-year in October 2021, down from 9.0% the month before, Pakistan’s Bureau of Statistics revealed on Monday. .

Analysts say Pakistanis have paid more for energy and food, possibly causing inflation to remain uncomfortably high in the current fiscal year amid a low rupee and high prices of raw materials on a global scale.

As the economy quickly recovers from the acute shock of Covid last year, there is a need to gradually normalize policy parameters, including the growth of monetary aggregates, ”the SBP said.

The central bank said these measures would moderate money supply growth as well as domestic demand, thereby helping to support the current economic recovery, meet the government’s medium-term inflation target and reduce pressures on the economy. rupee.

“It would encourage banks to offer better returns on deposits to attract these funds; thus serving SBP’s objective of encouraging savings, ”the statement added.

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