Pakistan central bank raises interest rate to 16% to curb inflation
Pakistan’s central bank raised its key policy rate by 100 basis points to 16 per cent on Friday, the bank said in a statement after a meeting of its monetary policy committee.
“This decision reflects the Monetary Policy Committee’s (MPC) view that inflationary pressures have proven to be stronger and more persistent than expected,” the central bank said in its statement.
The bank had kept the rate unchanged at its last two meetings in October and September.
The MPC was of the view that amid the on-going economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs.
“In turn, these shocks are spilling over into broader prices and wages, which could deanchor inflation expectations and undermine medium-term growth.
“As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.” The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched.
“At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority.”
The central bank MPC noted several key developments since the last MPC in October.
“First, headline inflation increased sharply in October, as the previous month’s administrative cut to electricity prices was unwound. Food prices have also accelerated significantly due to crop damage from the recent floods, and core inflation has risen further.
“Second, a sharp decline in imports led to a significant moderation in the current account deficit in both September and October. Despite this moderation and fresh funding from the ADB, external account challenges persist.
“Third, after incorporating the Post-disaster Needs Assessment of the floods and latest developments, the FY23 projections for growth of around 2 per cent and a current account deficit of around 3 per cent of GDP shared in the last monetary policy statement are re-affirmed. However, higher food prices and core inflation are now expected to push average FY23 inflation up to 21-23 per cent.”
Pakistan will also repay a $1-billion international bond on December 2, three days before its due date, the governor of Pakistan central bank told a briefing on Friday.
There has been growing uncertainty about the ability of Pakistan to meet external financing obligations with the country in the midst of an economic crisis and recovering from devastating floods that killed over 1,700 people.
The bond repayment, which matures on December 5, totals $1.08 billion, Governor State Bank of Pakistan Jameel Ahmad told a briefing, according to two analysts who were present.