SBP’s Performance Since 2018 There is rapid transmission of any change in the policy rate on the yield, for example, of treasury bills, as shown in Table 2.10. However, the secondary market has begun to anticipate future changes in the policy rate. This happened for the first time towards the end of 2021, when the yield on treasury bills jumped to 11.5 percent when the policy rate was 8.75 percent. Currently, the yield on 12-month treasury bills has approached 17 percent. This indicates that there is a high likelihood that the policy rate could be raised beyond 16 percent. Table 2.10: The Policy Rate and Yield on Treasury Bills (%) Policy Rate Treasury Bills 3 months 6 months 12 months June 2018 6.50 6.76- ­December 2018 10.00 10.30- ­June 2019 12.25 12.74- ­December 2019 13.25 13.45- ­June 2020 7.00 6.84 6.60 6.85 December 2020 7.00 7.11 7.19 7.29 June 2021 7.00 7.29 7.56 ­December 2021 8.75 10.38 11.34 11.48 June 2022 13.75 14.66 14.95 15.15 December 2022 16.97 16.81 16.81 The best illustration of this is in 2018-19. There was a big upsurge in the policy rate. This led a big increase in the budget deficit and the expansion in money supply of 21 percent was due domestic bank borrowing by the Government. Therefore, there is a strong tendency for an aggressive monetary policy to be largely neutralized by the fiscal consequences. Table 2.11: Federal Budget Deficit and Domestic Borrowing(adding to M2) Federal Budget Deficit [i] Government Domestic Bank Borrowing* [ii] Change in Money Supply(M2) [iii] 2018-19 3634 2167 1801 2019-20 3601 2181 3110 2020-21 3716 1718 3389 2021-22 5610 4432 3305 * Figures in brackets are the changes Source: SBP, MOF (Rs in Billion) [ii] as% of [iii] 120.3 70.1 50.7 134.1 2.6 Inflation Outlook The primary focus of the SBP remains on the rate of inflation, which is its primary goal of preserving price stability. This focus has been augmented by the new SBP Act. Consequently, the policy rate is used as the primary instrument by the Monetary Policy Committee(MPC) to tackle inflation. 35