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Economy

Pakistan's central bank hikes rates by 150 basis points to 8.75%

A shopkeeper serves a customer while selling dry fruits and grocery items along a market in Karachi, Pakistan June 11. The country's central bank tightens its monetary policy to counter inflationary pressures.   © Reuters

ISLAMABAD (Reuters) -- Pakistan's central bank on Friday raised its benchmark interest rate by 150 basis points to 8.75% as it grapples with surging inflation and uncertainty over the country's stalled IMF funding facility.

"The MPC was of the view that there is now a need to proceed faster to normalize monetary policy to counter inflationary pressures and preserve stability with growth", the State Bank of Pakistan (SBP) said in a statement, referring to its monetary policy committee.

Many analysts had been expecting the bank to lift rates, but the size of the hike was beyond most expectations.

The bank has been facing a falling Pakistani rupee, high inflation and a current account deficit while investors have become nervous over the outcome of talks between the government and the International Monetary Fund, which has delayed release of the next $1 billion tranche of a $6 billion loan facility.

The bank noted that the momentum of inflation had picked up "considerably", with headline inflation reaching 9.2% in October, up from 8.4% two months earlier.

The country's high inflation is hitting the country's sizeable poor and middle classes as prices for essentials such as food and fuel climb ahead of the cooler winter months.

The bank had flagged on Wednesday that "recent unforeseen developments" affecting the outlook for inflation and balance of payments, as well as uncertainty had prompted it to call its policy meeting a week earlier than scheduled.

"Looking ahead, the MPC re-iterated that the end goal of mildly positive real interest rates remains unchanged and, given today's move, expects to take measured steps to that end", the bank said.

The bank also announced on Friday that it would increase the number of monetary policy decisions each year to eight from six, with the next set to take place on Dec. 14.

Last week, the central bank announced it was lifting the cash reserve requirement for banks by 1 percentage point, the first such move in more than a decade, in another effort to deal with accelerating inflation.

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