SBP likely to yield to IMF demands, raising interest rates again

KARACHI: According to analysts, the central bank of Pakistan is likely to raise its key interest rate again in response to persistently high inflation, yielding to pressure from the International Monetary Fund (IMF). 

The IMF had recommended in a staff report that Pakistan should continue its monetary tightening cycle, and subsequently approved a new bailout arrangement to help the country avoid a debt default.

Out of 16 analysts, nine predict that the State Bank of Pakistan (SBP) will increase the key interest rate by 100 basis points to 23% during its upcoming policy meeting. One analyst expects a smaller 50 basis points increase, while six others anticipate no change in the interest rate.

In the Memorandum of Economic and Financial Policies resulting from discussions with the IMF, Pakistan expressed its readiness to take further action at the next monetary policy committee meeting and subsequent ones until inflation and inflation expectations show a decline.

Sami Tariq, the head of research at Pak-Qatar, believes that the central bank will raise rates by 100 basis points as a precautionary measure to control inflation, which has been driven by an increase in administered utility prices for gas and electricity.

Most analysts agree that the rate increase is mainly aimed at fulfilling the IMF’s criteria. They believe that the SBP will use further monetary tightening to dampen domestic demand, curb imports, reduce the current account deficit, and alleviate pressure on the national currency. However, the analysts who predicted no change in rates argued that there have been no significant changes in price pressures since the last policy meeting that would warrant a rate hike this month.