By Ariba Shahid
KARACHI, Pakistan (Reuters) -Pakistan’s central bank kept its key interest rate unchanged on Monday, in line with market expectations, and signaled that it would pause its tightening cycle as record-high inflation may have peaked.
The State Bank of Pakistan’s (SBP) key rate remains at a record high of 21%. The central bank has raised the rate by 1125 basis points since April 2022 to curb soaring inflation.
The monetary policy committee (MPC) “views inflation to have peaked at 38% in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards”, the SBP said in a statement.
The committee signaled it was likely done lifting rates for now, but acknowledged that stance was contingent on “effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”
“On balance, the MPC views the current monetary policy stance, with positive real interest rates on a forward looking basis, as appropriate to anchor inflation expectations and to bring down inflation towards the medium term target – barring any unexpected domestic and external shocks,” the statement said.
Analysts said that the decision was largely expected but Pakistan’s broader economic challenges, including repayment of its debt, continued to loom.
“This was expected as inflationary pressure are easing … SBP believes real rates are positive on forward looking basis thus justifying this decision,” said Sohail Mohammed, chief executive of brokers Topline Securities. “I think that biggest issue is how will Pakistan repay its upcoming 22 billion dollar debt repayment.”
Pakistan’s central bank chief said in a briefing to analysts shortly after the release of the monetary policy decision that Pakistan was not considering bilateral debt restructuring, five sources said.
The finance minister had said on Saturday that the government was working on the possibility of restructuring its bilateral debt regardless of whether it successfully completes its International Monetary Fund’s review to release stuck bailout funds.
As well as soaring inflation, cash-strapped Pakistan has been grappling with fiscal imbalances and critically low levels of reserves that barely cover a month of imports.
The MPC expects domestic demand to remain subdued due to high interest rates, domestic uncertainty and continuing stress on the external account. It said broad money growth had decelerated in May compared to the previous year, largely due to a substantial fall in private sector credit and a contraction of net foreign assets of the banking system.
(Reporting by Ariba Shahid in Karachi and Asif Shahzad and Gibran Naiyyar Peshimam in Islamabad; Writing by Charlotte Greenfield; Editing by Krishna N. Das)
