KARACHI (Reuters) -Pakistan’s central bank kept its key interest rate unchanged at 22% on Thursday, surprising analysts who had been expecting it to try to tame inflation and support the rupee with an increase of at least 150 basis points.
The bank, which was announcing the outcome of a policy review, said inflation was likely to increase “significantly” in September, but it expected it to then slow in October and maintain a downward trajectory from then.
The bank noted that the 27.4% annual CPI inflation recorded in August had slowed less than expected from the 28.3% recorded the previous month due to a surge in global oil prices.
Battling rising inflation and dwindling foreign exchange reserves, the crisis-ridden country is trying to navigate a path to economic recovery under a caretaker government in the wake of a critical $3 billion IMF loan programme, approved in July.
Reforms under the programme have complicated the task of keeping price pressures in check and protecting an already weak rupee from further declines.
The State Bank of Pakistan’s (SBP) monetary policy committee also kept the key interest rate unchanged when it last met in July, having earlier raised it by 12.25 percentage points to 22% in a series of hikes since April 2022.
Fahad Rauf, Head of Research at Ismail Iqbal Securities, a Karachi-based brokerage firm, said the decision to leave rates unchanged was warranted as there were no signs of an overheating economy, and that a rate hike in a cost push inflationary environment would have little benefit.
Cut-off yields in a recent treasury bill auction – the highest yield at which a bid is accepted – indicated that market participants had already priced in a rate hike.
“Yields should follow central bank not lead the State Bank of Pakistan. The cut off yield decision is taken by the Finance Ministry, whereas the policy rate decision is taken by the central bank,” said Shahbaz Ashraf, Chief Investment Officer at FRIM Ventures, a Karachi based investment company.
However, some analysts said the central bank was being optimistic with its inflation expectations.
“We believe there is a high risk that inflation may remain higher than the SBP estimate due to rising global oil prices and adjustment in energy prices in Pakistan,” said Mohammed Sohail, CEO of Topline Securities, a Karachi-based brokerage firm.
Pakistan’s currency has slid to all-time lows, falling 6.2% in the last month alone, though it has recovered some ground in recent days after a crackdown on illegal foreign exchange transactions.
During an analyst briefing, central bank governor Jameel Ahmed said the decision to keep rates unchanged had taken that crackdown into account.
(Reporting by Ariba Shahid in Karachi; editing by Sudipto Ganguly, Sharon Singleton and Andrew Heavens)