Pakistan raises key rate by 300 bps, slaps Rs 3.23 power surcharge

Pakistan’s central bank raised its benchmark interest rate to 20 per cent 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 per cent, the central bank said in a statement on its website. The move was seen by 6 of 38 economists, most of whom expected a 200-basis-point hike. The current 20 per cent 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 per cent-29 per cent against the November projection of 21 per cent–23 per cent, it said. Price gains quickened for a third month in February to 31.55 per cent, 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.

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.

Currency crisis deepens

Pakistan’s rupee touched a record low and its dollar bonds slumped on Thursday as the country struggles to unlock critical IMF funding, while a bigger-than-expected interest rate hike failed to revive its markets.

The rupee hit a record low of 284 per US dollar in local trading, Eikon data showed, before it retraced some losses to 279 per dollar, still down some 6 per cent. The country's international bonds fell by more than 3 cents in the dollar.

The currency - which has weakened by nearly 20 per cent since the start of the year - has been sliding after delays in a deal between Pakistan and the International Monetary Fund (IMF) that parties have been negotiating since early last month. “A delay in IMF funding is creating uncertainty in the currency market,” said Mohammed Sohail of Topline Securities, a Karachi-based brokerage house.

The IMF funding is critical for the South Asian economy, which has been in economic turmoil, to unlock other bilateral and multilateral external financing.

Pakistanis are paying a heavy price for the "conspiracy" of regime change, ousted prime minister Imran Khan said on Thursday.