Pakistan to go for another rate hike on IMF guidance, analysts say
Business
Nine out of 16 respondents 100 bps surge, one predicts 50 bps increase
KARACHI (Reuters/Web Desk) – Pakistan's central bank will likely raise its key interest rate again on Monday to tackle persistently high inflation, giving in to pressure from the International Monetary Fund (IMF), Reuters quoted analysts as saying.
The move is expected despite the fact that the business community has been critical of the rate hike trend, citing paralysed economic activity which means no expansion or growth in businesses and thus no new job opportunities for the people who have been crushed by unprecedented inflation.
Read more: High interest rates propel govt expenditure
Hence, reduced purchasing power means the domestic demand has shrunk amid a significant decline in exports due to high cost of production making the produce expensive in world markets where too the people are feeling the heat because of high inflation.
Reuters mentioned in its report that Pakistan must continue its monetary tightening cycle, the International Monetary Fund (IMF) said in a staff report earlier in July, a week after the lender approved a new bailout arrangement with the South Asian nation which helped it avert a debt default.
Nine out of 16 analysts predicted the State Bank of Pakistan will raise the key rate by 100 basis points (bps) to 23 per cent at its policy meeting next week, while one saw a smaller 50 bps increase and six expected no change.
The State Bank of Pakistan (SBP) has raised its key policy rate by 12.25 percentage points since April 2022, mainly to curb soaring inflation.
SBP held rates steady in June saying inflation had peaked at 38% in the preceding month. But before the end of the month, it raised rates by 100 bps at an emergency meeting in an effort to secure IMF funds, citing "slightly deteriorated inflation outlook".
In the Memorandum of Economic and Financial Policies (MEFP) that resulted from its talks with the IMF, Pakistan said it stands ready to consider further action at the next monetary policy committee meeting and subsequent ones until inflation and inflation expectations are on a clear downward path.
Read more: Businessmen express grave concern over SBP's decision to maintain 21pc policy rate
Sami Tariq, head of research at Pak-Qatar, said as a pre-emptive measure to control inflation arising out from increase in administered utility prices of gas and electricity, the central bank would raise rates by 100 bps.
Most analysts believe the rate increase would be done largely to satisfy the IMF's criteria.
However, Shivaan Tandon, an economist at Capital Economics, said that the worst may now be over for Pakistan given inflation is likely to have peaked and IMF funding is now secured.
Still, he added price pressures in the economy remain extremely elevated and policymakers would want to guard against the risk of high inflation becoming entrenched.
"We think the SBP will aim to suppress domestic demand through further monetary tightening to keep a lid on imports, contain the current account deficit and mitigate downward pressure on the currency," Tandon said.
However, the analysts who predicted no change in rates said there was no major change in price pressures since the last policy meeting to warrant a hike this month.
Mohammad Sohail, CEO at Topline, said the consumer price index, sensitive price index and the current account are all showing positive trends.
However, record-high interest rates and inflation skyrocketing the cost of production mean no one is ready to invest in productive sectors. Thus, this rate policy advocated by the IMF and pursued by top central banks will push Pakistan further into quagmire.
