January 28, 2020 / 3:16 PM / 22 days ago

Pakistan central bank holds rates at elevated level

KARACHI/ISLAMABAD (Reuters) - Pakistan’s central bank held its main policy rate at 13.25% on Tuesday as it juggled competing goals of adding stimulus to the economy and taming inflation.

FILE PHOTO: A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi, Pakistan July 16, 2019. REUTERS/Akhtar Soomro/File Photo

The State Bank has held rates at 13.25% since July, when it took a pause from a series of hikes at a level some businesses and exporters have said is hampering investment.

“While controlling inflation we also have to support sectors that contribute to our exports,” the State Bank of Pakistan’s governor Reza Baqir said at the bank’s first monetary policy announcement of 2020.

Inflation rose 12.6% in the year to December, just below an almost nine-year high of 12.7% hit a month earlier, as rising costs for items like food put pressure on household budgets and rising oil and power prices lifted costs for businesses.

“Inflation will start declining gradually, but when we’re not sure, we can’t say,” Baqir said.

The bank also announced measures to support exporters, such as increasing credit limits, underscoring the toll historically high rates are having on businesses for whom the prospect of higher borrowing costs could lead to holding off on investment.

VULNERABILITIES IMPROVING

The State Bank noted that key economic vulnerabilities that had sparked alarm for the government and economists the previous year were improving.

With sinking foreign reserves and a large current account deficit, Pakistan struck an agreement in April with the International Monetary Fund for a $6 billion three-year rescue package.

The current account deficit had contracted by 75% to $2.15 billion in the six months ending December, according to the bank’s monetary policy statement. Foreign reserves had risen more than 60% to $11.7 billion in the past six months.

Baqir said that a surge in portfolio inflows reflected an improvement in international investors’ credit assessment of Pakistan, and were deepening capital markets while representing limited risks.

But some economists have raised concerns about this so-called ‘hot money’ as Pakistan’s high interest rates draw foreign investment into short-term debt which could pose a risk if it is suddenly withdrawn.

“The State Bank is attracting ... hot money, they want hot money to keep coming for some time so the external account improves,” said Khurram Shehzad, an economist and financial analyst based in Karachi.

He added that in the medium term, Pakistan still needed either to ramp up fiscal spending or lower interest rates to spur economic activity.

“Stabilisation has taken place ... but post-stabilisation we now need growth,” he said.

Reporting by Syed Raza Hassan in Karachi and Charlotte Greenfield in Islamabad; additional reporting by Asif Shahzad and Gibran Naiyyar Peshimam; Editing by Catherine Evans

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