Central bank expected to keep Pakistan interest rates steady
Business
There has been no change since the hike to the current level of 22pc in June
KARACHI (Web Desk/Reuters) – As the businesses are eagerly awaiting reduction in borrowing costs, Reuters quoted analysts as saying that State Bank of Pakistan is widely expected to hold its key rate at 22 per cent for the fifth policy meeting in a row on Monday, though an expected easing of inflation could leave the door open for rate cuts in the future.
The decision is the last under a caretaker government before the country's general election next month. It also comes in the midst of Pakistan's $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF).
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With record-high inflation and interest rates, Pakistan has seen its economy crippled, further worsening the cost of living crisis being faced by an overwhelming majority.
While the rescue programme has helped avert a sovereign debt default, some of its conditions have complicated efforts to curb inflation.
Nine out of 10 analysts polled by Reuters predicted the SBP would keep interest rates unchanged on Monday, with one analyst predicting a 50 basis point (bps) cut.
"A rate cut is not justified. It will give the wrong signals to the IMF and show that Pakistan is not serious about controlling inflation," said Ali Farid Khwaja, co-founder of KTrade.
Pakistan's key rate was raised to an all-time high of 22pc in June.
Sami Tariq, head of research at Pak Kuwait Investment Company, expected the policy rate to be cut by 50 bps because real interest rates are positive on a forward looking basis.
Ahead of the IMF bailout, the latest tranche of which was approved on Jan 11, Pakistan had to undertake a slew of measures, including revising its budget, hiking its benchmark interest rate, and increasing electricity and natural gas prices.
The policy rate was raised in an off-cycle meeting in June in a last-gasp attempt to secure funds from the IMF as part of a reform programme aimed at bringing stability to the troubled $350 billion economy.
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Under the bailout deal, the IMF also required Pakistan to raise $1.34 billion in new taxation to meet fiscal adjustments. The measures fuelled record high inflation of 38pc year-on-year in May, and it is still hovering above 30pc.
The measures required by IMF also have dampened business sentiment, with businesses now asking for some respite in the form of a rate cut.
"There is mounting pressure on the SBP to start cutting rates, (but) the justification for doing so does not exist, and IMF has cautioned against it, too," said Khurram Husain, an economic analyst and journalist.
Still, some respite could be seen later this year if inflation continues to ease as expected.
The Institute of International Finance (IIF), in a country report on Wednesday, flagged that inflation would gradually decline to an average of 24pc in the current fiscal year and 14pc in fiscal year 2024/25.
The report added that while food and fuel inflation will ease this year, the IIF expects rupee devalution, rising energy prices, and increased taxes to feed into inflation, partly offsetting gains from falling commodity prices.
The rates decision will be the last under caretaker Prime Minister Anwaar ul Haq Kakar, with the country set to go to the polls on Feb 8.
Caretaker governments are usually limited to overseeing elections, but Kakar's set-up is the most empowered in Pakistan's history thanks to recent legislation that allows it to make policy decisions on economic matters, though analysts say the central bank itself operates independently.
The legislation is aimed at keeping on track the conditions for the bailout secured in June.
