ISLAMABAD: Pakistan's central bank Monday raised its key interest rate to 12.25 per cent to tighten the monetary policy, citing continuing inflationary pressures, a high fiscal deficit and recent exchange rate depreciation.
The 150 basis points increase follows a preliminary agreement last week with the International Monetary Fund for a USD 6 billion loan that is expected to come with tough conditions, including pressure for higher interest rates.
The State Bank of Pakistan (SBP) said that the new rate would be effective from May 21.
The central bank had previously raised the interest rate by 25 basis points to 10.75 per cent in its last monetary policy announced in March, but "greater reliance on central bank financing of the [fiscal] deficit has acted to dilute the impact of previous monetary tightening".
"Despite the improvement in the current account and a noticeable increase in official bilateral inflows, the financing of the current account deficit remained challenging.
Consequently, reserves declined to USD 8.8 billion as of 10th May 2019 from USD 10.5 billion at end-March 2019," the SBP said on Monday.
However, despite improvement in the current account, the Pakistani rupee has fallen sharply since the government reached an accord with the International Monetary Fund for a three-year USD 6 billion bailout package.
"The monetary policy committee noted that further policy measures are required to address underlying inflationary pressures from higher recent month-on-month headline and core inflation outturns, recent exchange rate depreciation, an elevated fiscal deficit and its increased monetisation, and potential adjustments in utility tariffs, according to SBP statement.
The data of the bank showed that the key interest rate gradually surged by a total of 6.5 percentage points since January 2018.
The new rate is the highest in the nearly past eight years and showed that the government was trying to control inflation by tightening the monetary policy.
However, it will hit the growth as the bank which in its reports said that the economic growth would be low in 2018-19 fiscal ending on June 30 but expected to pick up in the next year.
The SBP said that it will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market.