Pakistan central bank lifts key rate in surprise move on inflation

The State Bank of Pakistan (SBP) raised its key policy rate by 100 basis points to 16% on Friday, the bank said in a statement after a meeting of its monetary policy committee.

"This decision reflects the MPC's view that inflationary pressures have proven to be stronger and more persistent than expected," the central bank said in a statement, reuters reported.

The bank had kept the rate unchanged at its last two meetings in October and September.

The central bank said the decision is aimed at ensuring that elevated inflation does not become entrenched that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis. "Higher food & core inflation are key contributors to elevated inflation," it added.

Amid the ongoing economic slowdown, the SBP said inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs. "In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth."

As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response, the statement said. "The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched. At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority."

The country has been grappling with persistently high inflation, with the consumer price index (CPI) registering a 26.6% year-on-year rise in October, even as devastating floods and attempts to maintain fiscal discipline have resulted in a sharp economic slowdown.

"Looks like SBP (State Bank of Pakistan) more concerned with rising inflation. Moreover IMF talks for next tranche is under way and is delayed, that may have also compelled the committee to take this step to fight inflation," said Mohammad Sohail, an analyst with Topline Securities.

The SBP said they were reaffirming their GDP projection of about 2% for FY23 and also their current account deficit forecast of about 3% of GDP, but said they now expect higher food prices and core inflation to push average inflation to 21-23% versus 18-20% previously.

Devastating floods that peaked in August killed over 1,700 people and caused billions of dollars in damage to infrastructure as well as agricultural land.