Pakistan’s central bank raised its benchmark interest rate to 20% to rein in soaring inflation that it expects to quicken further as the country works to resume a $6.5 billion International Monetary Fund bailout.
(Bloomberg) — Pakistan’s central bank raised its benchmark interest rate to 20% to rein in soaring inflation that it expects to quicken further as the country works to resume a $6.5 billion International Monetary Fund bailout.
State Bank of Pakistan’s monetary policy committee increased the target rate by 300 basis points from 17%, the central bank said in a statement on its website Thursday. The move was seen by 6 of 38 economists, most of whom expected a 200-basis-point hike. The current 20% is the highest since June 1997 when the central bank used a different benchmark, according to data compiled by Bloomberg.
“The MPC noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near term inflation outlook and a further upward drift in inflation expectations,” the central bank statement said. “The short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched.”
The average inflation this fiscal year ending June is now expected in the range of 27%-29% against the November projection of 21%–23%, it said. Price gains quickened for a third month in February to 31.55%, the most since the 1960’s, according to central bank data.
“The Committee expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace,” the central bank said. SBP will hold its next monetary policy review on April 4.
The latest tightening comes as the nation tries to secure the IMF bailout to avert a debt default, unlock more funding and stave off severe supply shortages. There are $7 billion of repayments in the coming months, including a Chinese loan of $2 billion due in March, according to Fitch Ratings.
Pakistan needs to repay about $3 billion dues while $4 billion is expected to be rolled-over until June, Governor Jameel Ahmad said in an analyst briefing, adding that the nation remain “committed to make all debt payments.”
To get the IMF loan, the South Asian nation has increased taxes, raised energy prices and allowed the currency to depreciate — all of which risk feeding into inflation, complicating the situation for the monetary authority. Finance ministry officials will hold virtual talks with the multilateral lender until Friday, local news station Geo TV reported, citing Finance Minister Ishaq Dar.
What Bloomberg Economics Says…
The State Bank of Pakistan’s larger-than-expected hike in an off-cycle meeting on Thursday shows how desperately the country needs aid from the International Monetary Fund to avoid default.
—Ankur Shukla, India economists
For the full note, click here
Foreign exchange reserves were at $3.26 billion as of Feb. 17, just enough for less than a month of imports. Dollar shortage is restricting the nation’s ability to fund overseas purchases, stranding thousands of containers of supplies at ports, forcing plant shutdowns and putting tens of thousands of jobs at risk.
“FX reserves low and concerted efforts are needed to improve the external position,” SBP said. The IMF loan will help address near-term challenges, it said.
Moody’s Investors Service downgraded Pakistan deeper into junk this week, citing fragile liquidity conditions.
–With assistance from Tomoko Sato, Pradeep Kurup and Devidutta Tripathy.
(Updates with a chart and governors comments in seventh paragraph.)
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