Pakistan central bank raises key policy rate by 300 bps to 20%

Pakistan’s central bank raised its key interest rate by 300 basis points on Thursday, exceeding investor expectations, as the cash-strapped country attempts to encourage the International Monetary Fund to release critical funding.
The key rate of the State Bank of Pakistan (SBP) now stands at 20%, its highest level since October 1996.
Investors polled by Reuters had expected a rate hike of 200 bps.
The SBP had brought forward its policy meeting from an original date of March 16, with local media saying the rate hike was a key requirement to get the IMF funding released.
In its last policy meeting in January the bank raised the rate by 100 bps to 17%. It has now raised rates by a total of 1025 bps since January 2022.
“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, as reflected in the latest wave of surveys,” the SBP said in a statement.
The SBP sees inflation rising further before it begins to fall.
The central bank states that the average inflation for the year is now expected in the range of 27% — 29% against the November 2022 projection of 21 — 23%.
“In this context, the MPC emphasized that anchoring inflation expectations is critical and warrants a strong policy response.”
Suleman Maniya, head of advisory at Vector Securities, said that while the CPI can potentially increase more with the fiscal actions related to subsidy removals and exchange rate weakness, the government needs to focus on improving the supply side urgently, especially of food and agricultural items.
The government, for its part, is trying to cut expenditure and increase revenue through taxes, and has allowed the rupee to depreciate. As per the ninth review of a previous deal with the international lender, the IMF is due to release a tranche of over $1bn to Pakistan.
The Pakistani rupee slumped nearly 6% against the US dollar on Thursday with no clarity on the IMF fund release.
“Today’s slide in the rupee and policy rate hike can be seen as a step towards unlocking the next tranche from the IMF,” said Saad Rafi, head of equities at Al Habib Capital Markets.
Pakistan’s consumer price index (CPI) jumped 31.5% in February year-on-year, the highest annual rate in nearly 50 years, as food, beverage and transportation prices surged more than 45%.
The Committee also decided to hold its next meeting on April 4, 2023.
It was previously scheduled for April 27, 2023.