Pakistan apex bank raises rate to curb inflation

Pakistan’s central bank, State Bank, has raised its key interest rate by 100 basis points to 17% in an effort to curb persistently high inflation. This increase brings Pakistan’s benchmark rate to its highest level since October 1997. The move was in line with the majority forecast of economists and market watchers surveyed by Reuters.

The country is facing challenging times in its $350 billion economy, with high inflation and a sharp fall in reserves, which at $4.6 billion are not enough to cover even a month’s worth of imports. Additionally, Pakistan is still recovering from devastating nationwide floods last summer.

In November, the State Bank also unexpectedly pushed up its key rate by 100 bps and has now raised it by a total of 725 bps since January 2022. Although some moderation in inflation was seen in November and December, it remains high and core inflation has been on a rising trend for the last 10 months, according to the bank.

The lack of fresh financial inflows and ongoing debt repayments have led to a steady drawdown in official reserves, the central bank said. The Monetary Policy Committee (MPC) also noted that the country’s current fiscal stance is inconsistent with monetary tightening.

Pakistan is currently struggling to quell default fears in domestic and international markets, with a $1.1 billion IMF bailout tranche stuck due to differences over a program review that should have been completed in November. Other multilateral and bilateral financing avenues are linked to the IMF program, meaning the South Asian nation of 220 million people will be hard-pressed to meet its external financing needs of over $30 billion up until June 2023, including debt repayments and energy imports.