The State Bank of Pakistan (SBP) has hiked key interest rate by 150 basis points to 91-month(nearly eight years) high at 12.25% in anticipation of acceleration in inflation under the International Monetary Fund’s (IMF) loan programme on Monday.
The monetary policy committee at the central bank tightened the policy keeping in view the rising inflationary pressure due to rupee depreciation, potential increase in utility tariffs and uptrend in prices of petroleum products and essential food items at world markets.
The rate of inflation is expected to accelerate to five-year high at 9.59% in May compared to 8.82% in the previous month of April.
Secondly, speculation at local capital markets suggest the government agreed to increase the key interest rate by two percentage points under IMF’s 39-month long loan programme worth $6 billion. The rate-hike was a must to get IMF board’s final approval for execution of the loan programme.
The government entered into the IMF programme on May 12 and the IMF board is expected to meet sometime in June.
With the latest increase, the key interest rate has surged by a total of 6.5 percentage points since January 2018.
The IMF adopts a pro-active approach, meaning it convinces loan-acquiring countries to keep the interest rate higher than the projected rate of inflation in future rather than existing rate of inflation, Emerging Economics Research MD Muzammil Aslam explained.
“Inflation is set to be in double digits in July,” Sherman Securities’ analyst Chandar Kumar said.
Inflation would grow in the backdrop of rupee depreciation against the dollar, increase in petroleum oil prices in the international and domestic markets, and a further increase in power and gas tariffs in the near future, he said.
Aslam said considering for a while Pakistan had not entered into an IMF loan programme, then there was apparently no immediate need for the latest interest rate-hike.
Interest rate at 10.75% was much higher than the average rate of actual inflation at 7% for the first 10 months (Jul-Apr) of the current fiscal year 2019, he pointed out.