The State Bank of Pakistan (SBP) seeks to raise interest rates as early as this week in an off-cycle review, as the country faces pressure to mend its finances amid a $1.12 billion bailout from the International Monetary Fund.
Market participants in a recent treasury bill auction are expecting at least 17% or a 200 basis points increase in the central bank’s policy rate. The expected increase is based on the rates the government set in the auction to raise the funds.
Moreover, the government raised Rs258 billion in the auction on Wednesday. The cut-off rates for the three-month, six-month, and twelve-month periods jumped 195 bps, 206 bps, and 184 bps higher than the previous auction.
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Furthermore, the cash-strapped country is undertaking key measures to secure IMF funding to prevent it from default. The measures include raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. The government is optimistic that it would secure a deal with IMF soon.
According to the data released by the MPC, the rate was increased due to three major economic developments:
- Inflation
- External sector challenges
- Global economic conditions.
The Governor of the SBP said;
“The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves”
Assistant Vice President of Research at Pak Kuwait Investment Company, Adnan Sheikh, said that the increase in interest rate is imminent, and it could be as soon as Friday.
He said;
“The next policy meeting is too far. Given the circumstances, it’s already being priced in”
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Additionally, the Head of Research at Ismail Iqbal Securities, Fahad Rauf, was of the view that the IMF has given a target to at least keep rates higher than core inflation. Pakistan has two core inflation readings one is urban (15.4% for January) and the other is rural (19.4%) and no national core number is released. He said that if the bank tries to bring rates above rural core inflation, it requires a rate hike of at least 200-300 bps.