Pakistan likely to raise key rate to record 22% as inflation bites

Inflation clocked a 31.5% rise year-on-year in February

By Reuters

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A man carries sacks of free flour, received from a distribution point in Peshawar, Pakistan. Food, beverage, and transportation prices have all surged more than 45 per cent. - Reuters
A man carries sacks of free flour, received from a distribution point in Peshawar, Pakistan. Food, beverage, and transportation prices have all surged more than 45 per cent. - Reuters

Published: Fri 31 Mar 2023, 12:57 PM

Pakistan’s central bank looks set to raise its key interest rate by 200 basis points to a record high of 22 per cent at its review on April 4, as it struggles to bring down stubborn inflation, the median estimate in a Reuters Poll showed.

Eighteen out of 20 economists and market watchers surveyed said the central bank would hike rates, with 12 of them predicting a 200 bps increase. Two poll participants saw the benchmark raised by 100 bps, while four forecast a 150 bps hike. Two respondents expected rates to remain unchanged.


Worldwide growth in consumer prices has compounded high inflation in Pakistan caused by a weakening currency, energy tariff increases and elevated food prices due to Ramadan.

The latest consumer price-based inflation clocked a 31.5 per cent rise on year in February, the highest in nearly 50 years.


Food, beverage, and transportation prices have all surged more than 45 per cent and the country is in talks with the IMF to unlock its next tranche worth around $1.1 billion as part of a $6.5 billion bailout agreement reached in 2019.

On March 2, the State Bank of Pakistan (SBP) raised its key rate by 300 basis points to 20 per cent, exceeding market expectations, likely to meet a key requirement of the International Monetary Fund for release of its pending bailout funds.

“The CPI is expected to be 34-36 per cent due to hike in food prices in Ramadan. The weekly sensitive price index is also at an all time high of 47 per cent,” said Saad Habib, head of equities at Al Habib Capital Markets, a brokerage firm in Karachi.

The State Bank of Pakistan has raised rates by a total 10.25 per cent since January 2022.

Shivaan Tandon, an economist at Capital Economics, expects inflation to rise further in coming months as a weaker currency, higher taxes and shortages of key goods continue to exert upward pressure on prices. “Policymakers will also be keen to impress the IMF, by displaying their commitment to towards containing inflation, to secure a much-needed funding to mitigate the risk of default,” he added.

Some economists, however, felt with the last hike delivered just about a month ago, the central bank may prefer to wait to see the impact of the rate hikes on the economy before tightening further.


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