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Pakistan Prices Surging 10% May Force Central Bank to Hold Rates

The State Bank of Pakistan stands in Karachi, Pakistan. Photographer: Asim Hafeez/Bloomberg
The State Bank of Pakistan stands in Karachi, Pakistan. Photographer: Asim Hafeez/Bloomberg

Feb. 10 (Bloomberg) -- Pakistan may hold interest rates for a second straight meeting as the fastest inflation in Asia after Vietnam constrains the central bank’s scope to ease policy and revive the economy.

The State Bank of Pakistan will hold the discount rate at 12 percent, seven of 11 economists said in a Bloomberg News survey. Two predicted a cut to 11 percent and the rest a half-point reduction. The decision is due in Karachi tomorrow.

Consumer prices rose 10.1 percent last month in Pakistan, where growth is faltering after two major floods damaged crops in 2010 and 2011 and as an insurgency near the Afghan border hurts expansion. The disasters, security risks, elevated inflation and a budget shortfall have left the economy “highly vulnerable,” the International Monetary Fund said this week.

“It will be a difficult decision for the central bank to choose monetary discipline against supporting growth,” said Nurali Barkatali, an economist at BMA Capital Management Ltd. in Karachi. “But the inflation numbers are again on a rising path. Government borrowing is also above the agreed levels, which may convince the central bank not to reduce rates.”

Australia left rates unchanged this week and South Korea held off raising borrowing costs. Pakistan’s central bank cut rates by 2 percentage points in 2011, joining nations such as Indonesia in easing policy as Europe’s debt crisis hampered global expansion, before pausing in November.

Inflation Accelerates

Pakistan’s inflation in January accelerated from a 9.75 percent pace in December and was the second-fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

Central bank data shows government borrowing from the monetary authority rose 24 percent to 141.7 billion rupees ($1.6 billion) from July 1 to Jan. 27 compared with a year earlier.

The Pakistan rupee is down 6.1 percent against the dollar in the past year on concern foreign reserves will shrink as international aid dwindles.

Political risks have also deterred investors, with Prime Minister Yousuf Raza Gilani facing a contempt-of-court charge that threatens to force him from office.

The IMF said Feb. 6 Pakistan should broaden the tax base, curb some subsidies and curtail central bank financing of a budget gap that may rise to 7 percent of gross domestic product in the fiscal year ending June. Monetary policy is “too accommodative,” it said.

An $11.3 billion IMF loan to Pakistan expired in September, with disbursements suspended in May 2010 after the country failed to meet conditions attached to it. The lender forecasts GDP will rise 3.4 percent in the fiscal year through June.

Aid Flows

The U.S., the country’s largest export market and aid provider, held back $800 million in military assistance in July out of $2 billion pledged for this fiscal year because of disputes over how to combat terrorism.

Floods in August forced more than 1 million people from their homes, while militant attacks have killed at least 35,000 people since 2006, according to estimates from the government.

The $175 billion economy grew 2.4 percent in the year through June 2011, one of the smallest expansions in a decade.

Higher borrowing costs are capping industrial expansion, said Muhammad Fazlullah Shariff, chief executive officer Thatta Cement Co., a Pakistani maker of building materials. “I can hope for a rates decline, but it seems very unlikely,” he said.

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

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