Pakistan Unexpectedly Holds Rates Ahead of IMF Loan Review

Pakistan unexpectedly left the discount rate unchanged in a second straight meeting with expectations of a drop in consumer prices despite market expectations for prices to remain elevated.

(Bloomberg) — Pakistan unexpectedly left the discount rate unchanged in a second straight meeting with expectations of a drop in consumer prices despite market expectations for prices to remain elevated. 

State Bank of Pakistan Governor Jameel Ahmad said in an analyst briefing that the target rate is in line with International Monetary Fund conditions for a tighter policy ahead of a loan program review due November. Monetary policymakers raised rates by a cumulative 600 basis points since January as part of a pledge for Pakistan to clinch $3 billion in bailout loans. 

The central bank maintained the target rate at 22%, according to a statement on Thursday. Only four of the 41 economists surveyed by Bloomberg predicted a hold, the rest expected a hike. 

The Monetary Policy Committee assessed that the tight stance, improved agriculture outlook, and recent administrative and regulatory reforms will help achieve the medium-term inflation target, the central bank said in a statement. Domestic demand will remain contained due to elevated interest rates and fiscal consolidation, it added. 

The decision surprised analysts as the central bank offered more than a 25% yield in a treasury bill auction last week. Pakistan’s central bank clarified that majority of the bids were not that high and closer to the previous auction. Pakistan’s benchmark stock index is down 7% since its recent peak last month on fears of elevated inflation and the possibility of a rate hike.  

“There is a strong political will to control inflation and the rupee drop that has helped maintain rates,” Asad Javed, director at WE Financial Services Ltd., which predicted the decision, said by phone. “After a long time, we are seeing some serious government intervention.”

Pakistan’s rupee also dropped to a record this month but has strengthened since authorities launched a crackdown on the illegal trading of the currency. The central bank plans to introduce further reforms and more banks opening exchange companies that will increase transparency, said Ahmad.

“The MPC noted that inflation is likely to increase significantly in September mainly due to base effect and the adjustment in energy prices,” the central bank said, adding that price gains will subsequently decline in October and maintain its downward trajectory from thereon.

Pakistan’s inflation pace slowed to 27.38% in August but its expected to pick up due to increase in energy prices and a drop in the rupee, according to Ankur Shukla, South Asia economist at Bloomberg Economics. The caretaker government is pushing through with power and gas tariff increases as part of the IMF program, though this is raising living costs and has triggering protests. Shukla expects inflation to average 30% in the last four months of this year.

“The State Bank of Pakistan’s surprise decision to keep rates on hold on Thursday won’t help the economy. Real interest rates are now likely to remain negative on a forward-looking basis, according to our estimates, and that could worsen inflation,” said Shukla. “The decision could also hurt the prospects for aid from the International Monetary Fund, which has been pushing the country to raise rates.”

The South Asian nation can’t afford any delays in getting funds under the program. The nation has payments of about $24.5 billion in the financial year started July and the next IMF tranche is due in December. About $11 billion of total payments will be rolled-over while inflows are estimated at $14 billion for fiscal 2024, said governor Ahmad. 

(Updates throughout including governor’s comments)

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