Pakistan CB Raises Key Rate

Pakistan’s central bank unexpectedly increased its key rate for the first time in more than four years as a currency devaluation adds to inflation pressures ahead of elections this year.

The target policy rate was raised to 6% from 5.75%, State Bank of Pakistan Governor Tariq Bajwa said in Karachi late Friday. Only two of the 26 economists in a Bloomberg survey predicted the move, with most forecasting the rate would stay unchanged.

“We are pre-empting signs of economy overheating and trying to keep inflation under control,” said Bajwa. He expects average consumer prices to remain between the target of 4.5 and 5.5% in the year ending June. The central bank expects the economy to grow 5.8% this fiscal year, missing the 6% target, Bajwa said.

The move comes a day after Malaysia’s decision to raise interest rates and reflects growing concern about a build-up of inflation pressures ahead of July elections in an economy that’s showing signs of stress. The nation’s currency, which is a managed float, was devalued last month in the face of a widening current account deficit and dwindling foreign exchange reserves.

“The monetary easing period is over and now it’s going to be a little tightening,’’ Muzzammil Aslam, chief executive officer at EFG Hermes Pakistan Ltd., said before the decision. “Inflationary expectations are heightening due to the recent devaluation while the current account situation has hit an increasingly alarming level.’’

“The cut and the devaluation in rupee signal they are going towards an IMF bailout package,” said Fatiq Bin Khursheed, head of research at Next Capital Ltd., who was among the two analysts who correctly predicted the 25 basis-point hike. “This is the first of many hikes.”

The rupee declined 4.8% against the dollar last month, the worst performer in Asia, while consumer prices rose 4.6% in December from a year ago, the highest in seven months. Pakistan’s current account deficit increased about 60% to $7.4 billion in the six months ended December, according to the central bank.

Meanwhile, the All Pakistan Business Forum has said that the target of taking exports to $35 billion by 2020 is much below Pakistan’s potential, asking economic planners to facilitate non-textile sectors as well to ensure a sustainable increase.

APBF President Ibrahim Qureshi, however, said that the most serious threat to the economy in the new fiscal year would be inflation.