Pakistan Maintains Key Interest Rate at 22% Amid High Inflation and Global Uncertainty

The State Bank of Pakistan (SBP) has decided to maintain its key policy rate at 22% for the seventh consecutive policy meeting, as the country continues to confront high inflation and limited foreign exchange reserves. The central bank's Monetary Policy Committee (MPC) stated that it was "prudent" to maintain the current monetary policy stance to bring inflation down to the target range of 5-7% by September 2025.

While inflation has moderated in the second half of the current fiscal year, it remains elevated due to factors such as higher global commodity prices and budgetary measures that may increase local prices. The MPC noted that "macroeconomic stabilization measures have contributed to improvements in inflation and the external position, but the level of inflation is still high."

The central bank's decision comes as Pakistan is seeking approval for a $1.1 billion funding from the International Monetary Fund (IMF) under a $3 billion standby arrangement to avert a sovereign default. The country is also hoping to sign a longer-term program with the IMF to aid its economic recovery.

Why this matters: Pakistan's high interest rate and ongoing negotiations with the IMF underscore the challenges the country faces in stabilizing its economy and managing its debt obligations. The outcome of these efforts will have significant implications for Pakistan's economic future and the well-being of its citizens.

The MPC emphasized the need for further build-up of foreign exchange buffers to enhance the country's ability to respond to external shocks and support sustainable economic growth. It also reiterated the importance of fiscal consolidation, particularly through broadening the tax base and reducing losses of public sector enterprises, for price stability and durable economic growth.

The economic activity in Pakistan is recovering at a moderate pace, led by a strong rebound in the agriculture sector. The current account has turned out better than expected, recording a sizable surplus in March 2024, which helped stabilize the SBP's foreign exchange reserves. However, the MPC highlighted risks from global oil price volatility, the potential inflationary impact of resolving circular debt in the energy sector, and tax-driven fiscal consolidation.

The MPC's decision to maintain the policy rate at 22% for the seventh time aligns with the stance of other leading central banks, particularly in advanced economies, who have adopted a cautious approach after noticing some slowdown in the pace of disinflation in recent months. The SBP's monetary policy stance aims to steer inflation towards the target range while supporting a moderate economic recovery amidst global uncertainties and domestic challenges.

Key Takeaways

• Pakistan's central bank holds key policy rate at 22% to curb high inflation.
• Pakistan seeks $1.1 billion IMF funding to avert sovereign default amid economic challenges.
• Central bank emphasizes need to build foreign exchange reserves and fiscal consolidation.
• Economic activity recovering moderately, but risks from global oil prices and energy sector.
• Central bank's stance aligns with other leading central banks' cautious approach.