ISLAMABAD: Pakistan’s central bank said on Monday it had raised the key policy rate by 100 basis points to 11.5 percent, its first hike in almost three years, underscoring “intensified risks” to the country’s macroeconomic outlook due to the Middle East conflict.
The State Bank of Pakistan (SBP) had cut rates by a cumulative 1,150 basis points since June 2024, from a record high of 22 percent. The hike in the key rate came as rising oil prices from the United States-Iran war threatened to push inflation higher in the South Asian nation.
Pakistan’s consumer price inflation quickened to 7.3 percent in March compared to the same period last year, breaching the central bank’s 5 percent to 7 percent target range, with some analysts warning it could approach 10 percent in April.
SBP’s Monetary Policy Committee (MPC) noted that global energy prices, freight charges and insurance premiums continue to remain significantly above pre-conflict levels, with supply chain disruptions contributing to the prevailing uncertainty.
“While the incoming data has been broadly in line with the MPC’s expectations so far, the impact of these global developments will be visible in key economic indicators going forward. In this backdrop, the Committee assessed that inflation is likely to increase and remain above the target range in the next few quarters,” the SBP said.
“The MPC deemed it necessary to maintain a tighter policy stance to keep inflation expectations anchored and contain second-round effects of the current supply shock to bring inflation within the target range. This will be important to preserve macroeconomic stability, which is necessary for achieving sustainable economic growth.”
Pakistan is on a $7 billion International Monetary Fund (IMF) program. The Fund has previously cautioned against premature easing and urged the bank to maintain a positive real interest rate.
Apart from the geopolitical events, inflation expectations and confidence of consumers and businesses has deteriorated in latest surveys, and real gross domestic product (GDP) grew by 3.8 percent in the first half of this fiscal year (July-December) as compared to 1.9 percent in the same period last year, according to the MPC.
The country’s foreign exchange reserves stood at around $15.8 billion as of April 24, and a staff-level agreement was reached with the IMF on March 27.
“In light of the above developments… the MPC viewed today’s decision as important to achieve the objective of price stability over the medium term,” the central bank said.
