Pakistan Unexpectedly Increases Policy Rate to 13% to Slow Price Increases
Syed Yousuf Raza Gilani, Pakistan's prime minister, looks on during a meeting with U.S. President Barack Obama, unseen, at the Blair House in Washington. Photographer: Olivier Douliery/Pool via Bloomberg
Pakistan’s central bank unexpectedly increased its benchmark interest rate for the first time in four meetings as power and food costs add to inflationary pressures.
The State Bank of Pakistan increased its discount rate to 13 percent from 12.5 percent, Yaseen Anwar, acting Governor of the State Bank of Pakistan said at a news conference in Karachi. All 16 estimates in a Bloomberg News survey were for the rate to be kept unchanged.
Pakistan, which has one of the world’s highest benchmark rates, joins Asian economies from India to Malaysia in raising borrowing costs as the region leads the global economic recovery. The move comes even as Pakistan Prime Minister Syed Yousuf Raza Gilani’s government stresses the need for low borrowing costs to support economic growth.
“Government borrowings and expected pressure from tariff and commodity price may have convinced central bank to tighten the policy,” Asad Farid, economist at AKD Securities Ltd. in Karachi, said before the announcement.
Inflation in June stood at 12.69 percent in Pakistan. Average inflation in the year starting July 1, may be as high as 12 percent, Anwar said.
“There are risks to the inflation outlook,” he said today. “Persistent energy shortages and poor law and order are adding to the problems.”
Borrowing Costs
The World Bank said last month South Asian economies including Pakistan need to raise borrowing costs to contain inflation.
Pakistan raised power rates by 7.6 percent on July 1, an increase that took effect retrospectively in April, to meet a condition set by the International Monetary Fund for an $11.3 billion bailout.
Food prices may also increase in August as demand rises during the Muslim holy month of Ramadan starting next month.
“Power tariff rise and food prices may increase the pace of price gains,” AKD’s Farid said.
Higher borrowing costs may hurt companies including Engro Corp. and D.G. Khan Cement Co. which has taken loans to expand their businesses.
The government expects the South Asian economy to grow 4.5 percent in the year that started July 1, the fastest pace in three years.
Fiscal Deficit
The nation’s fiscal deficit target of 4 percent of gross domestic product “seems challenging,” Anwar said. It may reach 5 percent in the year that started July 1, he said.
The gap in the year ended June 30, may widen to 6.4 percent of GDP, compared with a revised target of 5.1 percent, he said.
In the last three reviews the central bank kept the benchmark interest rate unchanged after cutting it three times in 2009 by a cumulative 2.5 percentage points.
To contact the reporter on this story: Farhan Sharif in Karachi, Pakistan at Fsharif2@bloomberg.net
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