Pakistan’s central bank unexpectedly raised its benchmark interest rate by 100 basis points amid elevated inflation as the economy struggles to recover.
The State Bank of Pakistan increased the target rate to 16% on Friday. The move was seen by one out of 44 economists in a Bloomberg survey. The rest expected the rate to be kept at 15%.
“Inflationary pressures have proven to be stronger and more persistent than expected,” the State Bank of Pakistan said in a statement. Raising the rate to 16% “is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis.”
The decision comes as the South Asian faces a slowing economy. Floods that killed more than 1,600 people this year halved growth and caused billions in damage. The nation’s latest loan from the International Monetary Fund has also been delayed. The lender wants Pakistan to tally up its losses from the floods before releasing more money.
In the short term, the economic outlook looks bleak. Inflation rose more than expected to about 26.6% in October but is expected to ease in the coming months. Pakistan’s foreign exchange reserves cover about one month of imports, less than the three month benchmark and indicative of the nation’s funding strain.
The country is in the throes of a combustible political situation. Former premier Imran Khan, who was ousted from office this year, is scheduled to make his first appearance at a public rally on Saturday after he was shot in the leg. For months, Khan has been pushing for early national elections, and with tensions high, the government has warned that more social unrest could follow.
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After Pakistan appointed a new finance minister in late September, the rupee rebounded from a record low of 240.375 per dollar in late July. The currency has posted declines in the past weeks and is expected to weaken by 10% in the coming months because of economic and political woes, according to Mackay Shields UK LLP and Tellimer Ltd.
