Pakistan central bank hikes key rates by 125 bps to cool economy

Pakistan's central bank on Thursday raised its main policy rate by 125 basis points to 15 per cent in its effort to cool the economy, just days after data showed that inflation hit a 13-year high last month.

Pakistan's inflation surged to 21.3 per cent in June, its highest since 2008, data released last week showed.

The central bank has raised its key interest rate by 525 basis points since the start of this year.

"This combined action continues the monetary tightening underway since last September, which is aimed at ensuring a soft landing of the economy amid an exceptionally challenging and uncertain global environment," the central bank said in a statement.

It said the increased rate should help cool economic activity, prevent a de-anchoring of inflation expectations and support the rupee amid high inflation and record imports.

The bank's Monetary Police Committee also forecast inflation between 18 per cent and 20 per cent and GDP growth between 3 per cent and 4 per cent for the current fiscal year to June 30, 2023, below the 5 per cent target set in the annual budget in June.

"Despite the dampening effect of fiscal and monetary tightening on demand-pull inflation, inflation is likely to remain elevated around current levels for much of FY23," the bank said.

Public Policy Specialist Zubair Faisal Abbasi called the bank decision a step in right direction.

"Provided the government does not resort to fiscal expansion, restrictive monetary policy shall help stabilise prices or help slow down the rate of inflation in the economy," he told Reuters.

The South Asian nation of 220 million has been facing economic turmoil, with fast dwindling foreign reserves and a record depreciation of its currency.

"The current account deficit is projected to narrow to around 3 percent of GDP as imports moderate with cooling growth, while exports and remittances remain relatively resilient," the bank said.

Pakistan is in dire need of external funding to shore up its foreign reserves, now just above $10 billion following a $2.3 billion loan from China.

Islamabad is in talks with the International Monetary Fund, and its latest review, if positive, would release a $1.85 billion loan and open up other external financing options.

"Wee hope that we will reach a staff level agreement with the IMF very soon," the bank's acting governor, Murtaza Syed, said after the rate announcement.

Pakistan entered the 39-month, $6 billion IMF programme in 2019, but less than half of the amount has been disbursed so far as Islamabad has struggled to meet agreed targets.

As stressed by the IMF, the government is now fully in fiscal consolidation mode, Economics Professor Dr. Aqdas Afzal told Reuters. "The fiscal discipline invariably narrows down the current account deficit," he added.