Pakistan central bank lifts key rate to curb inflation

Pakistan’s central bank raised its key policy rate by 100 basis points to 16% on Friday in an unexpected move to ensure high inflation does not get entrenched.

Including this increase, the central bank has raised its key rate by 625 basis points cumulatively in 2022. It kept the rate unchanged at its last two meetings in October and September.

“This decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected,” the central bank said in a statement after a meeting of its monetary policy committee.

State Bank of Pakistan Governor Jameel Ahmad said at an analyst briefing after the move that the tightening so far was enough to achieve the central bank’s objectives at this time.

Despite the likelihood of inflation being more persistent than previously anticipated, the bank said it still expected it to fall toward the upper range of a 5-7% medium-term target by the end of the financial year 2024. “Maintaining fiscal discipline is needed to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities.”

A majority of respondents in a survey by Topline Securities earlier this month forecast no change to the policy rate, and a cut by the end of the current financial year in June 2023.

Pakistan has been grappling with persistently high inflation, with a 26.6% year-on-year rise in the consumer price index (CPI) in October, despite devastating floods and attempts to maintain fiscal discipline leading to an economic slowdown.

“Looks like SBP is more concerned with rising inflation. Moreover IMF talks for next tranche is under way and is delayed, that may have also compelled the committee to take this step to fight inflation,” Topline analyst Mohammad Sohail said.

Pakistan’s timely finalisation of a recovery plan from the floods is essential to support discussions and continued financial support from multilateral and bilateral partners, the International Monetary Fund (IMF) said on Wednesday.

The SBP reaffirmed a GDP projection of about 2% for the financial year 2023 and also a current account deficit forecast of about 3% of GDP, but said it now expects higher food prices and core inflation to push average inflation to 21-23% versus their earlier estimate of 18-20%.

Pakistan to repay $1 bln bond early: c.bank chief.

Pakistan will repay a $1 billion international bond on Dec. 2, three days before its due date, the governor of Pakistan’s central bank told a briefing on Friday.

There has been growing uncertainty about the ability of Pakistan to meet external financing obligations with the country in the midst of an economic crisis and recovering from devastating floods that killed over 1,700 people.

The bond repayment, which matures on Dec. 5, totals $1.08 billion, Jameel Ahmad, Governor State Bank of Pakistan, told a briefing, according to two analysts who were present.

Ahmad added that funding has been lined up from multilateral and bilateral sources to ensure the repayment would not affect foreign exchange reserves. An immediate inflow of $500 million was expected next week on Tuesday from the Asian Infrastructure Investment Bank, he said.

Pakistan’s reserves with the central bank stood at $7.8 billion as of Nov. 18, barely enough to cover a month’s imports.

Ahmad said reserve levels will depend on the continued realisation of expected inflows and rollover of loans from friendly countries, but added he was confident the reserve figure will be “much higher” by the end of the financial year in June 2023.

He told the briefing he expects external financing requirements would be met on time because of inflows from international lenders. He pointed out that, despite payments of $1.8 billion in November, reserves remained stable.

The International Monetary Fund (IMF) said earlier this week that Pakistan’s timely finalisation of a recovery plan from devastating floods is essential to support discussions and continued financial support from multilateral and bilateral partners.

Pakistan is currently in an IMF bailout programme, which it entered in 2019, but a firm date for the ninth review to release much-needed funds is pending even as it battles a full-blown economic crisis, with decades-high inflation and low reserves.

The central bank raised its key policy rate by 100 basis points to 16% on Friday in an unexpected move to ensure high inflation does not get entrenched. The country has been grappling with persistently high inflation, with a 26.6% year-on-year rise in the consumer price index (CPI) in October, despite devastating floods and attempts to maintain fiscal discipline leading to an economic slowdown.