Pakistan’s central bank is widely expected to raise interest rates later on Friday, having brought forward a policy meeting as the rupee hit a record low last week amid doubts over whether the International Monetary Fund will release a stalled $1 billion loan tranche.
The State Bank of Pakistan (SBP) has been grappling with a falling Pakistani rupee, high inflation and a current account deficit while investors have become nervous over the outcome of talks between the government and the IMF, which has delayed release of the next tranche of a $6 billion loan facility.
The bank had flagged on Wednesday that “recent unforeseen developments” affecting the outlook for inflation and balance of payments, as well as uncertainty had prompted it to call its policy meeting a week earlier than scheduled.
Several analysts expect the central bank to hike interest rates more aggressively than it did in September, when the benchmark policy rate was increased by 25 basis points to 7.25%.
“We expect SBP to increase the policy rate by 75-100 bps,” said Mohammed Sohail, chief executive of Topline Securities. “We believe that this is a signal that the increase in the policy rate is unlikely to be gradual and measured,” he added.
Topline Securities’ survey of over 70 market participants found that 70% expected a hike of 25 basis points or more.
Pakistan’s IMF funding facility was suspended in April with the latest round of talks taking place between the Pakistani government and IMF in Washington last month to restart the program. Pakistan’s finance minister said this week that an agreement had been made with several conditions but added it was unclear when it would be finalised.
The Pakistani rupee has come under pressure, in part due to the uncertainty over the outcome of those talks, and fell to a record low of around 173.20 against the US dollar last week. It is now trading around 174.74 against the US dollar.
Last week, the central bank announced it was lifting the cash reserve requirement for banks by 1 percentage point, the first such move in more than a decade.