Pakistan's Key Interest Rate Expected to Remain Unchanged Amid High Inflation: Analysts

Introduction:

Pakistan’s central bank is anticipated to maintain its key interest rate at 21% in light of aggressive rate hikes implemented since April last year. These measures were implemented to combat record-high inflation amidst the nation’s worst-ever economic crisis. As the country grapples with economic challenges, analysts weigh in on the potential impact of maintaining the current policy rate.

Record-High Inflation and Aggressive Rate Hikes:

Pakistan has witnessed a substantial increase in its key interest rate, with a staggering 1125 basis points (bps) hike since April 2022. In response to the nation’s severe economic crisis and soaring inflation, 17 out of 18 analysts surveyed expect no change in the key rate on Monday, while one analyst predicts a 100 bps hike.

Stabilizing Inflation and Global Commodity Prices:

Analysts generally agree that with inflation reaching its peak and global commodity prices showing signs of decline, there is no immediate urgency for further interest rate hikes. In May, inflation surged to a record high of 37.97%, making it the highest in South Asia, surpassing Sri Lanka’s annual inflation of 25.2% in the same month. However, experts anticipate a decrease in inflation due to the high base effect.

Economic Outlook and Monetary Tightening:

Fahad Rauf, head of research at Ismail Iqbal Securities, expects June’s inflation rate to be around 30%, compared to the previous month’s 38%. He also points out that the country’s GDP growth was a mere 0.3% and may be revised to a negative figure once the final/revised GDP numbers are released next year. On the other hand, Shivaan Tandon, an economist at Capital Economics, suggests a 100 bps rate hike. Tandon argues that the central bank cannot afford to keep the policy rate unchanged, citing the necessity to curb high inflation and support the currency through monetary tightening. Rate hikes may also serve as a signal to potential creditors about the authorities’ commitment to addressing external imbalances.

Policy Decision and Economic Reforms:

The central bank’s policy decision follows the annual budget presentation to parliament, which is scheduled for Friday. The government aims to strike a delicate balance between satisfying the International Monetary Fund (IMF) through necessary reforms and implementing measures to win over voters in an impending election expected by November. With limited foreign reserves, barely sufficient to cover a month’s worth of imports, Pakistan is taking steps to secure a $1.1 billion loan as part of a $6.5 billion IMF bailout package. These measures involve increasing taxes, removing blanket subsidies, and lifting artificial curbs on the exchange rate.

Conclusion:

As Pakistan grapples with its worst-ever economic crisis and soaring inflation, the decision to maintain the key interest rate at 21% reflects a cautious approach by the central bank. While some experts argue for further rate hikes to combat inflation and support the currency, others believe the current plateauing of inflation and declining global commodity prices provide room for stability. The upcoming budget presentation and reforms will play a crucial role in addressing the nation’s economic challenges while striving for long-term sustainability and meeting IMF requirements.