Pakistan central bank hikes rates amid currency woes, warns growth will slow

Monday, 1 October 2018 00:35 - - {{hitsCtrl.values.hits}}

ISLAMABAD (Reuters): Pakistan’s central bank hiked key interest rates by 100 basis points on Saturday to ease currency pressures, but warned that economic growth would slow down, amid intensifying speculation about an International Monetary Fund bailout.

Raising rates to 8.5%, which was widely expected by the market, the State Bank of Pakistan (SBP) cited rising inflation and economic worries over the large fiscal and current account deficits.

The SBP said growth was expected to fall to 5% in the fiscal year ending 30 June, down from 5.8% in financial year 2017/2018, the highest pace of economic growth in more than a decade.

“Concerns on the economic front continue to persist on the back of rising inflation and large twin deficits, and are likely to compromise the sustainability of the high real economic growth path,” the SBP said in a statement.

Headline inflation has averaged about 5.8% in the first two months of this financial year, up from an average of 3.9% for the whole of 2017/2018, SBP said. The Bank also warned that rising oil prices and growing uncertainty across emerging markets posed further risks.

But the biggest problem for the economy remains a shortage of dollars, with the blow-out in the current account deficit fuelling widespread speculation that Pakistan may need another bailout from the International Monetary Fund.

Finance Minister Asad Umar says Pakistan has not yet made up its mind on whether to seek a bailout. At present, an IMF technical team is in Islamabad, though officials say it is a routine visit that is unrelated to any assistance package.

To deal with the crisis, Pakistan’s central bank had already hiked rates by 175 basis points since January and devalued the currency four times since December. Pakistan’s foreign currency reserves have plunged to below two months’ cover, falling this week to about $ 9 billion from $ 16.4 billion in May 2017, despite China propping up the reserves with loans worth several billion dollars.