Pakistan raises key rate to record 21% to curb crippling inflation

Pakistan raises key rate to record 21% to curb crippling inflation
FILE PHOTO: A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi, Pakistan July 16, 2019. REUTERS/Akhtar Soomro/File Photo

KARACHI, Pakistan :Pakistan’s central bank raised its key interest rate to a record 21 per cent on Tuesday as the cash-strapped country bid to curb crippling food inflation and maintain the confidence of foreign creditors.

The 100 basis-point (bp) increase by the State Bank of Pakistan (SBP) was less than the 200 forecast by a Reuters poll of analysts as the country grapples with record annual consumer inflation of over 35 per cent.

Global factors have compounded consumer inflation already buoyed by Pakistan’s weakening currency, energy tariff increases and hikes in food prices due to Ramadan.

Food, beverage, and transportation prices have all surged more than 45 per cent, putting pressure on household budgets and leaving many desperate. At least 16 people were killed in stampedes for food aid last week.

“The MPC considers the current monetary policy stance appropriate and stresses that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next eight quarters,” the SBP said in a statement.

The SBP has hiked its key rate by a cumulative 1025 bps since January 2022.

The rupee closed at 287.29 against the dollar, its lowest ever level, after depreciating over 1 per cent during the day. The currency has lost more than 20 per cent of its value since the start of the year.

The SBP may have held back from a more aggressive rate hike due to indications that a broad economic slowdown is already likely, said Tahir Abbas, head of research at Arif Habib limited.

“A majority of the high frequency indicators already depict negative growth and a massive slowdown in the economy,” Abbas said. “An aggressive rate hike won’t be of much help.”


Pakistan is in talks with the International Monetary Fund to unlock its next loan tranche worth around $1.1 billion as part of a $6.5 billion bailout agreement reached in 2019.

In early March, the central bank raised its key rate by 300 basis points to 20 per cent, exceeding market expectations, in what many saw as a bid to ensure the release of bailout funds.

In its statement, the SBP said an early conclusion of the ninth review of the IMF program was critical to rebuilding foreign exchange reserve buffers.

Analysts said the governor of the SBP stated in a private briefing that principal repayments of $4.5 billion remained due during the last quarter of the fiscal year, which ends on June 30.

Of that, $2.3 billion will be rolled over, while repayments of $2.2 billion are payable, the analysts said. Most of the repayments are multilateral and bilateral with $100 million in commercial loans.

As Pakistan bids to avoid a possible default on foreign obligations, the only help so far has come from longtime ally Beijing, through a $1.8 billion refinancing and a rollover of $2 billion in March.


Source: Reuters