Pakistan raises key interest rate to 12.25 percent

KARACHI: Pakistan's central bank raised its key interest rate by 150 basis points to 12.25 percent on Monday, citing continuing inflationary pressures, a high fiscal deficit, and recent exchange rate depreciation.

The State Bank of Pakistan (SBP) said trends in government borrowing showed a widening fiscal deficit during the first nine months of the fiscal year.

The central bank had previously raised the interest rate by 25 basis points to 10.75 per cent in its last monetary policy announced in March, but "a greater reliance on central bank financing of the [fiscal] deficit has acted to dilute the impact of previous monetary tightening".

"Despite the improvement in the current account and a noticeable increase in official bilateral inflows, the financing of the current account deficit remained challenging. Consequently, reserves declined to US$ 8.8 billion as of 10th May 2019 from US$ 10.5 billion at end-March 2019," the SBP said on Monday.

However, despite improvement in the current account, the Pakistani rupee has fallen sharply since the government reached an accord with the International Monetary Fund for a three-year $6 billion bailout package.

According to the SBP, the exchange rate has depreciated by 5.93 percent to PKR 149.65 per USD since the last monetary policy announcement, reflecting a combination of underlying macroeconomic factors and market sentiment considerations.

"In SBP's view, the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors," said the central bank.

"SBP will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market," it added.