Pakistan Raises Interest Rate to Highest in Three Years
(Bloomberg) -- Pakistan raised its key rate to the highest in three years, making it Asia’s most aggressive interest-rate hiker this year as the country’s finances continue to dwindle.
The target policy rate was raised for the third straight meeting to 8.5 percent from 7.5 percent, the State Bank of Pakistan said in a statement on Saturday. The move was predicted by eight out of 27 economists, according to a Bloomberg survey. One expected the rate would be unchanged, while the others forecast a less aggressive hike. Policy makers have already raised rates by 1.75 percentage points since November, taking the discount rate to the highest in more than three years.
The move follows emerging markets from Argentina to Indonesia that are trying to fight currency turmoil triggered by tighter U.S. Federal Reserve policy. However, Pakistan is dealing with a crisis that’s more home grown. Dwindling foreign-exchange reserves and a current-account deficit blowout have aggravated economic pressures as a political transition following July elections has slowed economic decision making.
“Concerns on the economic front continue to persist on the back of rising inflation and large twin deficits, that are likely to compromise the sustainability of the high real economic growth path,” the central bank said. “Economic activity is likely to slowdown -- inflation is inching up.”
Prime Minister Imran Khan is under pressure to generate external funding. Pakistan’s Finance Minister Asad Umar told Bloomberg last month that the government may need more than $12 billion to halt an impending financial crisis. Pakistani officials met with a visiting International Monetary Fund in Islamabad on Thursday amid speculation it may seek financial aid from the Washington-based lender. An IMF loan is looking more likely since Pakistan delegations that visited China and Saudi Arabia this month made no announcement that they had secured external funding from those countries.
The rate hike “is another signal that they are going to the International Monetary Fund,” said Ashfaque Hasan Khan, dean at the business school of Islamabad’s National University of Sciences and Technology and an economic adviser to the government.
The central bank has devalued the rupee four times since December and raised its inflation forecast range to 6 percent to 7 percent in the fiscal year through June 2019. Umar said last week that Pakistan’s current-account and fiscal deficits may both stay above 5 percent of the gross domestic product this year.
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