A brass plaque of the State Bank of Pakistan is seen outside its wall in Karachi, Pakistan December 5, 2018. REUTERS/Akhtar Soomro/File Photo
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- Inflation outlook for FY22 climbed above 11%
- Domestic crisis hits currency, secondary markets
- Foreign exchange reserves held by banks fall to $11.3 billion
ISLAMABAD, April 7 (Reuters) – Pakistan’s central bank hiked its key interest rate by 250 basis points to 12.25% in an emergency meeting on Thursday, the bank said in a statement, the biggest hike in years.
The State Bank of Pakistan (SBP) cited a worsening inflation outlook and increasing risks to external stability, compounded by the Russia-Ukraine conflict and domestic uncertainty.
The hike was unscheduled as the next Monetary Policy Committee (MPC) meeting was scheduled for late April, but the bank had warned last month it could meet earlier than expected to ensure external and price stability.
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“Since the last MPC meeting, the inflation outlook has deteriorated and risks to external stability have increased,” SBP said in a statement on Thursday.
“Futures markets are suggesting that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to hike interest rates faster than previously expected,” the statement added.
Domestically, the bank said inflation participation in March was higher than expected and political uncertainty, culminating in a standoff between Prime Minister Imran Khan and the opposition, made matters worse. Continue reading
“Increased political uncertainty domestically has contributed to a 5 percent depreciation in the rupee and a sharp increase in domestic secondary market yields as well as Pakistani Eurobond yields and CDS spreads since the last MPC meeting,” the bank said.
It also pointed to pressures from a sharp drop in foreign exchange reserves. Reserves held by the central bank fell $728 million to $11.3 billion through April 1, compared with $16.2 billion on March 4.
The bank said the decline was largely due to debt repayments and government payments related to settling an arbitration award related to a mining project.
Some of the decline is expected to be reversed as creditors roll over their loans, the bank said, assuring that Pakistan’s external financing needs in FY22 will be fully met from identified sources.
Average inflation forecasts were revised upwards to just over 11 percent in FY22.
The SBP is in the process of taking other measures to ease inflation and current account pressures, including raising interest rates on refinancing programs.
“This move by SBP was also necessary as market yields on T-bills did not match the policy rate, leading to an anomalous situation,” said Topline Securities’ Muhammad Sohail.
The government of Pakistan raised 645 billion Pakistani rupees ($3.43 billion) in an auction of Treasury bills on Wednesday, with 12-month yields up 13.3%.
($1 = 188,0000 Pakistani Rupees)
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Reporting by Asif Shahzad and Gibran Peshimam in Islamabad; Writing from Alasdair Pal; Edited by Raissa Kasolowsky, David Holmes and Mark Porter
Our standards: The Thomson Reuters Trust Principles.
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