Pakistan’s Central Bank Boosts Interest Rate to Highest Since 1999

A vendor covers herself with a plastic sheet to protect from rain while she waits for customers at a market, in Lahore, Pakistan, on July 21, 2022. AP Photo/K.M. Chaudary

Pakistan’s central bank on Nov. 25 raised its key policy rate by 100 basis points to 16 percent—the highest level since 1999—amid persistent global and domestic supply shocks that have pushed inflation higher.

The country’s Monetary Policy Committee (MPC) said the decision was made to prevent inflation from spiraling out of control as inflationary pressures have turned out to be “stronger and more persistent than expected.”

“It is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” the MPC said in a statement.

“These shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth. As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.”

The move brings the State Bank of Pakistan’s 2022 increases to 625 basis points. The central bank had kept the rate unchanged at its last two meetings in October and September.

According to the MPC, Pakistan’s headline inflation rose to 26.6 percent in October, driven by increases in energy and food prices of 35.2 percent and 35.7 percent, respectively.

Core inflation increased to 18.2 percent and 14.9 percent in rural and urban areas, respectively. Food prices have accelerated significantly due to crop damage from recent floods that have affected more than 30 million people.

“The floods could make it challenging to achieve the aggressive fiscal consolidation budgeted for this year, but it is important to minimize slippages by meeting additional spending needs largely through expenditure re-allocation and foreign grants, while limiting transfers only to the most vulnerable,” the MPC stated.

“Maintaining fiscal discipline is needed to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities.”

Martin Raiser, World Bank vice president for South Asia, last month urged Pakistan’s government to take internal measures to revive its economy, pointing to citizens who were already burdened by high energy costs.

“This is why the [authorities] are facing losses in distribution and the prices are high,” he said in an interview with local outlet Geo TV. Raiser recommended Pakistan adopt reforms in its energy sector.

Reuters contributed to this report.