Pakistan braces for another rate hike as energy prices continue propelling inflation
Business
Rising energy prices under IMF programme is fuelling inflation in the country
KARACHI (Reuters) – Pakistan's central bank is expected to go for another rate hike when it meets to decide on policy on Thursday as it seeks to tackle sky-high inflation and bolster diminished foreign exchange reserves that have sent the rupee to record lows.
Economic and political crises have seen the State Bank of Pakistan lift its benchmark rate by 12.25 percentage points to 22 per cent since April 2022, although it held the rate steady at its last meeting in July.
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A Reuters poll of 17 analysts show that 15 are forecasting a rate hike. Of those, nine predict an increase of at least 150 basis points. The other two analysts expect the interest rate to remain unchanged.
The South Asian nation is trying to navigate a tricky path to economic recovery under a caretaker government in the wake of a $3 billion IMF loan programme, approved in July, which helped avert a sovereign debt default.
Reforms set out as conditions for the loan have complicated the task of keeping price pressures and declines in the rupee in check. An easing of import restrictions and the removal of subsidies - both conditions of the bailout - have fuelled spikes in energy prices.
Although overall inflation fell slightly to 27.4pc in August, food inflation remained elevated at 38.5pc. The rupee has also slid to all-time lows, falling 6.2pc in the last month alone, although it has recovered some ground in recent days after a crackdown on illegal foreign exchange transactions.
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"The recent currency depreciation is also a key reason why another rate hike is likely, especially since the use of foreign-exchange reserves which are still very low is not a viable option," said Shivaan Tandon, economist at Capital Economics.
He added that while import controls have been relaxed, the move has pushed the current account back into a deficit, which pushes up the costs of imports and paying debt.
"Since import controls are no longer an option as well, due to the IMF agreement, policymakers may have to resort to tighter monetary policy to curtail demand and rein in the deficit," he said.
Read more: Fuel, electricity price hikes to boost inflation: Ministry of Finance
Pakistan's central bank said in July that it expects inflation to be on a downward path over the next 12 months.
Analysts also noted that rises in cut-off yields in treasury bill auctions - the highest yield at which a bid is accepted - indicate that market participants expect a rate hike.
