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Pakistan raises key interest rate to 7.5%

Central bank acts to offset inflationary pressures

Pakistan's annual inflation rate in June spiked to 5.21% from 4.19% in May, the biggest increase in almost four years.   © Reuters

KARACHI (Reuters) -- Pakistan's central bank on Saturday raised interest rates by 100 basis points to 7.5 percent, adding to a hike in May in order to offset inflationary pressures after a currency depreciation.

The Pakistani rupee slumped 3.8 percent against the dollar last month before slightly recovering in what appeared to be the third currency devaluation in seven months by the central bank amid fears of a balance of payments crisis.

The central bank governor, Tariq Bajwa, said strong fiscal expansion in the second half of 2018 was likely to offset monetary tightening in the recent months.

He also said higher international oil prices had inflated the import bill, rising inflation projections.

Pakistan's annual inflation rate in June spiked to 5.21 percent from 4.19 percent in May, the biggest increase in almost four years.

Pakistan's rapidly-depleting foreign currency reserves, which tumbled to $10.3 billion in May from $16.4 billion a year earlier have dampened the economic outlook even though the economy grew nearly 6 percent, the fastest pace in 13 years.

The decline in reserves and a widening of Pakistan's current account deficit have prompted many financial analysts to predict Islamabad will need an International Monetary Fund bailout after the election in July.

It would be its second bailout since 2013. The last IMF assistance package was worth $6.7 billion. 

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