Pakistan Holds Rates as Surging Prices Curb Room to Boost Growth

Pakistan left interest rates unchanged for a fourth meeting as it struggles to contain the fastest inflation in Asia while supporting economic growth.

The State Bank of Pakistan kept the discount rate at 12 percent, its spokesman Syed Wasimuddin said in Karachi yesterday. Nine of 11 economists in a Bloomberg News survey predicted the outcome. Two expected an increase of 0.5 percentage point.

Pakistan cut taxes and raised government salaries last week in an election-year budget that risks missing a target to narrow the fiscal deficit from a three-year high. Government spending threatens to stoke an inflation rate that exceeded 12 percent in May, adding to challenges from persistent power blackouts, an insurgency on the Afghan border and a faltering global recovery.

“The danger is that inflation will stay in double digits in the coming fiscal year, partly because of budget spending,” Nurali Barkatali, an economist at BMA Capital Management Ltd. in Karachi, said before the decision.

The central bank is not expecting a sharp increase in inflation, which it forecasts will hover around current levels in the year starting July 1, according to the monetary policy statement released yesterday.

Pakistan’s rupee has weakened about 10 percent against the dollar in the past 12 months, spurring import costs. The benchmark Karachi Stock Exchange 100 Index has risen almost 10 percent in the same period, aided by the government’s decision to ease rules on capital-gains tax.

Narrower Deficit

Finance Minister Abdul Hafeez Shaikh said on June 1 that the South Asian nation will aim to narrow its fiscal deficit to 4.7 percent of gross domestic product in the year ending June 30, 2013 from 7.4 percent in the current year.

Inflation accelerated to a 10-month high of 12.29 percent in May. The pace of price gains is the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The government estimates the $200 billion economy will probably expand 3.7 percent in 2011-2012 and has a goal of 4.3 percent growth for the next fiscal year.

Dwindling aid flows from the U.S. following disputes over how to combat terrorism and stabilize neighboring Afghanistan pose another obstacle to faster economic development. Domestic political tension has also intensified before general elections that are due to be held by February.

To contact the reporter on this story: Farhan Sharif in Karachi at fsharif2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.