KARACHI: Pakistan on Tuesday raised its key policy rate by 100 basis points to 13.25 percent, an eight-year high, mainly due to inflationary pressures and the impact of recent increases in utility prices, the central bank governor said.
The increase follows the approval this month of a $6 billion bailout from the International Monetary Fund that comes with tough conditionalities aimed at cutting Pakistan’s fiscal and current account deficits and shoring up dwindling currency reserves.
“The decision [to raise the key interest rate] takes into account upside inflationary pressures from exchange rate depreciation since the last monetary policy committee (MPC) meeting on May 20, 2019 and the likely increase in near-term inflation from the one-off impact of recent adjustments in utility prices and other measures in the FY20 budget,” central bank governor Dr Reza Baqir said at a press conference. “The decision also takes into account downside inflation pressures from softening demand indicators.”
The central bank’s inflation projections for the current fiscal year (FY20) remained below those of the central government’s, which had predicted a 11-13 percent inflation rate during the federal budget announced last month.
“The monetary policy committee expects average inflation of 11–12 percent in FY20, higher than previously projected,” Baqir said. “Nevertheless, inflation is expected to fall considerably in FY21 as the one-off effect of some of the causes (price hike of gas and electricity through budgetary measures) of the recent rise in inflation diminishes.”