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Pakistan lifts interest rate to 17% in battle against inflation

Central bank calls price stability crucial to sustainable growth

Pakistan's central bank raised its benchmark interest rate by 100 basis points on Jan. 23 to 17%, the highest since 1997.   © Reuters

KARACHI (Reuters) -- Pakistan's central bank on Monday raised its key interest rate by 100 basis points to 17% in a bid to rein in persistently high inflation, and it said achieving price stability was key to attaining sustainable economic growth in the future.

The increase, which matched the majority forecast of the economists and market watchers surveyed by Reuters, takes Pakistan's benchmark rate to its highest level since October 1997.

Policymakers are facing tough times in the $350 billion economy, with high inflation and a sharp fall in reserves, which at $4.6 billion are not enough to cover even a month's worth of imports. The country is also struggling in the wake of devastating nationwide floods last summer.

"The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer-than-anticipated period," the State Bank of Pakistan (SBP) said in a statement, referring to the Monetary Policy Committee. "The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future."

In its last policy meeting in November, the State Bank unexpectedly pushed up its key rate by 100 basis points and has now raised it by a total of 725 basis points since January 2022.

Although some moderation was seen in inflation in November and December, it remains high and core inflation has been on a rising trend for the last 10 months, the apex bank added.

"The SBP had failed to anticipate the sharp rise in inflation and is now playing catch-up to satisfy the International Monetary Fund's concerns," said Yousuf Nazar, an economist and former strategist at Citigroup. "More importantly, the SBP is continuing with the policy of artificially maintaining an unrealistic exchange rate, which has led the remittances to fall by an average of $500 million per month since July."

The lack of fresh financial inflows and ongoing debt repayments have led to a steady drawdown in official reserves, the central bank said.

The MPC also noted that the country's current fiscal stance is inconsistent with monetary tightening.

"Thus, given the evolving macroeconomic challenges, it is important for fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth," it wrote.

Pakistan is struggling to quell default fears in domestic and international markets, with a $1.1 billion IMF bailout tranche stuck due to differences over a program review that should have been completed in November.

Other multilateral and bilateral financing avenues are linked to the IMF program, meaning the South Asian nation of 220 million people will be hard-pressed to meet its external financing needs of over $30 billion up until June 2023, including debt repayments and energy imports.

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