ISLAMABAD: The State Bank of Pakistan (SBP) has decided to increase policy rate by 300 basis points to 20 per cent amid rising inflation.

The development came after the monetary policy committee of the SBP held a meeting on Thursday, which said that recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near-term inflation outlook and a further upward drift in inflation expectations, reports Xinhua news agency.

 "The committee believes that this outlook warrants a strong policy response to anchor inflation expectations," the SBP said in a statement.

"The committee expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace," the central bank added.

During the meeting, the monetary policy committee noted that reduction in current account deficit was important, but required concerted efforts to improve the external situation.

The committee also said that any significant fiscal slippage would undermine monetary policy effectiveness in the context of achieving price stability, the SBP said.

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