© Reuters. FILE PHOTO: A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi, Pakistan July 16, 2019. REUTERS/Akhtar Soomro/File Photo
By Ariba Shahid
KARACHI (Reuters) -Pakistan’s central bank on Monday held its key rate at 22% for the fifth policy meeting in a row and increased its full-year inflation projections.
The governor of the State Bank of Pakistan said the decision was warranted due to “elevated” inflation – which was 29.7% in December. He said a rise in the bank’s average inflation forecast for the fiscal year ending in June to 23-25%, from a previous projection of 20-22%, was due to rising gas and electricity prices.
The decision is the last under a caretaker government before general elections due next week and comes as Pakistan undertakes reforms linked to a $3 billion Standby Arrangement with the International Monetary Fund (IMF).
“SBP opted for a wait and see approach during this policy (meeting) and refrained from abruptly starting a monetary easing cycle,” said Tahir Abbas, head of research at Arif Habib Limited.
“Economic indicators are gradually improving and inflation is expected to decline significantly from March 2024 onwards, where we believe that (the) SBP is expected to start a monetary easing cycle,” he said.
The country’s external accounts and foreign exchange reserves have improved, the current account deficit is expected to shrink, the central bank’s governor Jameel Ahmad said.
Pakistan’s key rate was raised to an all-time high of 22% in June to fight persistent inflationary pressures and to meet one of the conditions set by the IMF for securing the bailout.
While the rescue programme has helped avert a sovereign debt default, some of the attached conditions, such as raising its benchmark interest rate, increasing government revenue, and increasing electricity and prices, have complicated efforts to curb inflation and have dampened business sentiment.
But Ahmad said that Pakistan was in a “better position” since signing the IMF stand-by agreement.
Despite negative real rates, the business community had been pushing for a rate cut for some respite amidst the economic challenges.