Pakistan Central Bank to Stay Vigilant Despite Stable Inflation

(Bloomberg) -- Pakistan’s central bank sees inflation behaving well in the next financial year beginning July, but will stand ready to use monetary policy tools after the most aggressive interest rate tightening in Asia last year, its governor said.

Consumer price growth will be anchored by low food inflation, State Bank of Pakistan Governor Tariq Bajwa said in an interview. While inflation accelerated to 8.2 percent in February, the highest since 2014, the central bank doesn’t see average inflation for next year breaching double digits.

“I’ll not be surprised if the inflation rate for the next year continues to be more or less the same, and starts coming down end of next fiscal year,” said Bajwa, who delivered 450 basis points of interest rate hikes in the past 16 months. “We have also shown that taming of the inflation rate is one of our priorities and we will continue to move as far as policy rate is concerned.”

The monetary policy tightening was also aimed at containing the financial blow outs from Pakistan’s twin current-account and budget deficits, which limited the nation’s ability to repay debt and pay for much-needed imports. Prime Minister Imran Khan’s government is in talks for a bailout package from the International Monetary Fund, in addition to securing soft loans from friendly nations to bridge the financing gap.

The crisis has already caused economic growth to slow, while fanning inflation. The median forecast in a Bloomberg survey for inflation in Pakistan in the second quarter of 2019 is 7.8 percent, the highest in the Asia Pacific.

“The criteria is that real interest rate should be in positive territory,” Bajwa said, referring to the rate after adjusting for inflation that currently stands at 2 percent. “That’s the benchmark we will be following.’’

The central bank has also removed permission to pay for some imports in advance and also restricted purchase of non-essential items. That’s helped narrow Pakistan’s trade balance to a 29-month low in February, according to Karachi-based brokerage Arif Habib Ltd.

“The policy measures that we have taken, some of them have set into the system,” Bajwa said. “Others are yet to reflect.’’

--With assistance from Michelle Jamrisko and Tuhin Kar.

To contact the reporters on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net;Ismail Dilawar in Karachi at mdilawar@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Ashutosh Joshi

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