Pakistan central bank lifts key policy rate to 8.75% amid surging inflation

In this picture taken on April 5, 2019, Pakistani customers buy grocery items at a market in Karachi, Pakistan. (AFP/File)
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Updated 20 November 2021
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Pakistan central bank lifts key policy rate to 8.75% amid surging inflation

  • SBP says inflationary pressures have increased considerably with headline inflation rising to 9.2% in October
  • Rate hike comes as Pakistan is in negotiations with the International Monetary Fund over a $6 billion loan program

KARACHI: Pakistan's central bank on Friday hiked its key policy rate by 150 basis points to 8.75%, citing risks related to surging inflation and the balance of payments.
Pakistan's current account deficit has swollen to $1.66 billion in October from $1.13 billion in September due to a moderate decline in exports, remittance inflows and some uptick in service imports.

Increased energy prices have kept the import bill high despite a downtick in non-energy imports, according to State Bank of Pakistan (SBP) data released ahead of the monetary policy statement. The current deficit for FY22 is expected to exceed previous forecasts of 2-3 percent of gross domestic product.
“The Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 8.75 percent,” SBP said. “This reflected the MPC’s view that since the last meeting, risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve."

As the Monetary Policy Committee meeting was previously scheduled for Nov. 26, the central bank said it took place earlier "in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments, and to help reduce the uncertainty about monetary settings prevailing in the market." 
The SBP said inflationary pressures have increased considerably with headline inflation rising from 8.4% (yoy) in August to 9% in September and further to 9.2% in October, mainly driven by higher energy costs and a rise in core inflation.  

"With respect to the balance of payments, the current account deficits in September and October have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand," the central bank said. "The burden of adjusting to these external pressures has largely fallen on the rupee."

The decisions come as the South Asian nation is in negotiations with the International Monetary Fund (IMF) over a $6 billion loan program.
"Falling foreign exchange reserves, higher current account deficit, inflationary pressure and obviously pending IMF deal could be possible reasons of policy rate hike," Muhammad Sohail, chief executive of Topline Securities, told Arab News.
Khurram Schehzad, chief executive of Alpha Beta Core, a financial advisory platform, said "seems so," when asked whether the hike was related to the country's stalled IMF funding facility talks.

The central bank on Friday also decided to increase the number of annual monetary policy committee meetings from six to eight.

"Massive rate hike in a go, and MPS now going to take place eight times a year than six times earlier," Schehzad said. "What happened to 'gradual' and measured response to markets for a direction, as SBP mentioned earlier in its policy statements?"

The rise of the benchmark interest rate to one and half year high exceeded market expectations.
“Higher than expected rise,” Sohail said, adding the central bank's decision to also raise Cash Reserve Requirement (CRR) by 1% for banks was a surprise move

Most of respondents of a Topline Securities survey expected a rise of between 75 bps and 100bps.


Pakistan says Afghanistan has created conditions ‘similar to or worse than’ pre-9/11 attacks

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Pakistan says Afghanistan has created conditions ‘similar to or worse than’ pre-9/11 attacks

  • The statement followed a suicide blast at a mosque in Islamabad that killed over 30, injured 169
  • Pakistan frequently accuses the Afghan Taliban of backing militants, an allegation denied by Kabul

ISLAMABAD: Pakistan’s president has warned that the Taliban’s government in Afghanistan has created conditions “similar to or worse than” those before the Sept. 11, 2001, attacks, a sign of rising tensions with Kabul after last week’s mosque attack in Islamabad, which analysts said Monday highlights militants’ reach to the capital.

Asif Ali Zardari made the remarks while thanking the international community for condemning Friday’s suicide bombing at a Shiite mosque that killed 31 worshippers and wounded 169. Without directly blaming India, Zardari also said Pakistan’s eastern neighbor was “assisting the Taliban regime and threatening not only Pakistan but regional and global peace.”

In a statement issued Sunday, Zardari said Pakistan “takes strong exception to the situation in Afghanistan where the Taliban regime has created conditions similar to or worse than pre-9/11, when terror organizations posed threats to global peace.” He added that Pakistan had long maintained terrorism cannot be confronted by any single country in isolation.

The unusually strong comments were likely to irk Kabul and New Delhi, both of which have condemned the suicide attack claimed by Daesh (Islamic State) and have denied any involvement.

The previous Afghan Taliban government, which ruled Afghanistan from 1996 to 2001, had been blamed for sheltering the Al-Qaeda chief Osama bin Laden who was behind the Sept. 11, 2001 attacks that killed more than 3,000 people in the United States. The Afghan Taliban also allowed Al-Qaeda to operate training camps within Afghanistan, despite international warnings. However, bin Laden was killed during a US commando operation in Pakistan in May 2011.

Last week, Afghanistan’s Defense Ministry and New Delhi, in separate statements, rejected the Pakistani allegations, saying Islamabad had irresponsibly linked them to the attack.

Pakistan frequently accuses the Afghan Taliban, who returned to power in August 2021 in Afghanistan, of backing militants including the Pakistani Taliban, known as Tehreek-e-Taliban Pakistan (TTP). Both deny the accusations.

There was no immediate response from India or Afghanistan to Zardari’s latest allegations, which came after Interior Minister Mohsin Naqvi said the bomber involved in the attack was a Pakistani and trained by Daesh in Afghanistan.

Naqvi said security forces had arrested four suspects, including an Afghan national accused of links to the militant group and of helping mastermind the attack. The detainees included the bomber’s mother and brother-in-law, according to officials who said investigations into the attack were still ongoing.

Pakistan has not shared full details about the involvement of the bomber’s family, however.

On Monday, Naqvi received telephone calls from his Italian counterpart Matteo Piantedosi and European Commissioner Magnus Brunner, who condemned the mosque attack. According to a government statement, Naqvi maintained that “Pakistan is a shield for the world against terrorism and emphasized that strong global-level measures are needed today to protect the world from terrorism”.

Asif Durrani, Pakistan’s former special representative for Afghanistan, said Zardari’s warning was “unambiguous: terrorism thrives where it is tolerated, facilitated, or used as a proxy.”

He wrote on X that “allowing terrorist groups to operate from Afghan soil and India’s use of proxies to destabilize Pakistan is a dangerous path with grave regional and global consequences.” Durrani added, “Peace demands responsibility, not denial.”

Another Islamabad-based analyst, Abdullah Khan, said the preliminary findings into the mosque bombing suggest the attack may reflect a pattern seen in some IS attacks involving close family networks. He said the IS affiliates have at times recruited entire families, pointing to past attacks in Pakistan and Indonesia.

Although Islamabad has seen fewer attacks than some other regions, Pakistan has experienced a recent rise in militant violence, much of it attributed to Baloch separatist groups and the TTP, which is separate from but allied with Afghanistan’s Taliban.

Daesh’s regional affiliate, a major Taliban rival, has carried out attacks across Afghanistan.