Pakistan central bank raises key rate by 100 bps to record 21% amid high inflation

Pakistan's central bank on Tuesday raised its key interest rate by 100 basis points to its highest-ever level in a bid to arrest the soaring consumer prices that the cash-strapped country has been trying to contain.  

In its monthly statement, the State Bank of Pakistan (SBP) said its key rate now stands at a record 21 per cent as the country struggles with consumer price inflation that reached its highest annual level ever of just over 35 per cent in March. 

“The MPC considers the current monetary policy stance appropriate and stresses that today’s decision, along with previous accumulated monetary tightening, will help achieve the medium-term inflation target over the next eight quarters,” the SBP said in a statement. 

The domestic currency closed at 287.29 against the dollar, its lowest ever level, after depreciating over 1 per cent during the day. 

Investors polled by Reuters had mostly expected a rate hike of 200 basis points. 

Last week, the consumer price inflation in Pakistan jumped to a record 35.37 per cent in March from a year earlier. The Pakistan’s statistics bureau said that the March inflation number eclipsed February’s 31.5 per cent, as food, beverage and transport prices surged up to 50 per cent year-on-year. 

Last month, the central bank raised its key rate by 300 basis points to 20 per cent, exceeding market expectations, as the country was trying its best to meet a key requirement of the IMF for release of the pending bailout funds. 

In its statement, the SBP on Tuesday again said that the early conclusion of the ninth review of the IMF program was critical to rebuild FX reserve buffers. 

Food shortage in Pakistan 

Soaring prices in the past few months have put pressure on household budgets and left people desperate in the country. To help the poor during the holy month, the cash-strapped country launched an initiative to distribute free flour among low-income families to ease the impact of record-breaking inflation and soaring poverty. 

But the initiative led to extreme violence, wherein at least 21 people have been killed since the start of the Muslim fasting month of Ramadan. 

On Saturday, at least 16 people were killed in stampedes for food aid after thousands gathered at the flour distribution centres. Police said people are desperate for food, which has led to violence, loot and robbery of food articles from trucks and distribution points. 

Rescue plan 

Last one year, Pakistan's economy has been pushed to the brink of collapse, exacerbated by a global energy crisis and devastating floods that submerged a third of the country in 2022. 

Adding to this, worldwide growth in consumer prices has compounded high inflation in Pakistan, which has further weakened the domestic currency. Along with this, the high energy tariffs and elevated food prices due to Ramadan have added to the trouble for the Pakistanis. 

The South Asian nation, which is home to more than 220 million people, is deep in debt and needs billions of dollars of financing to service existing debt.  

To address that, it desperately needs tough tax reforms and push up utility prices in a bid to unlock another tranche of a $6.5 billion IMF bailout to stay afloat. 

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