Pakistan may raise rates by 125 basis points to rein in 13-year high inflation

ISLAMABAD, July 5 (Reuters) – Pakistan’s central bank is expected to raise its key rate by 125 basis points in its review on Thursday as it tries to tackle 13-year high retail price inflation, based on the median estimate of a snapshot poll. of 10 economists and market observers.

Economists, analysts and senior professors surveyed were widely divided on the amount of the increase by the State Bank of Pakistan (SBP), with opinions ranging from 50 to 200 basis points. Two respondents did not see the need to increase fares.

The central bank raised the benchmark interest rate by 150 basis points in May, bringing the total increase to 400 basis points so far this year to counter rising inflation.

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The South Asian nation is grappling with economic turmoil, dwindling reserves and a weakening currency.

Friday’s data showed consumer prices in June jumped 21.3% from a year earlier, largely due to a 90% spike in fuel prices since late May after that the government has removed costly fuel subsidies.

With a current policy rate of 13.75% and much higher inflation, real interest rates in the economy have turned significantly negative.

“The latest statement from the monetary policy committee is proof that the State Bank of Pakistan is well behind the curve when it comes to inflation expectations,” said Yousuf Nazar, an economist who writes for various publications and a former of Citigroup.

“Another hike would increase public debt service costs and hurt industries. It won’t have much impact on the exchange rate or aggregate demand,” he added.

Most thought a hike was inevitable, given persistently high global energy prices, the abrupt end of fuel subsidies as well as the need to control demand after the SBP said in its latest policy statement that the economy had rebounded much stronger than expected.

“The overall policy mix is ​​focused on stabilization and demand management,” Macro Economic Insights CEO Sakib Sherani said, adding that this would lead to a sharp economic downturn or even a recession in the near term. .

But Fahad Rauf, head of research at Ismail Iqbal Securities, said he saw no need to raise rates further.

“The economy is already slowing down. Layoffs have started and are expected to increase further. Further cost pressures would only further burden industries and workers,” Rauf said.

“The fiscal arm is now working, tough measures have been taken. The SBP must await results before tightening further,” he added.

With Pakistan expecting a restart of the International Monetary Fund’s long-awaited bailout after the country agreed on tough economic policy adjustments to promote stability, the SBP’s decision is being watched closely.

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Reporting by Gibran Peshimam and Asif Shahzad in Islamabad and Syed Raza Hassan in Karachi; Editing by Swati Bhat and Jacqueline Wong

Our standards: The Thomson Reuters Trust Principles.

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