The 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), analysts said. Nine out of 16 analysts predicted the State Bank of Pakistan (SBP) 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, a private TV channel reported. The 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 38pc 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 a “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. Sami Tariq, head of research at Pak-Qatar, said as a preemptive measure to control inflation arising out from an 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.
