ISLAMABAD (Reuters) - Pakistan’s central bank on Friday hiked key interest rates by 150 basis points to 10 percent and sharply cut growth forecasts, warning that the economy faces mounting headwinds from rising inflation and high current account and fiscal deficits.
“Continued inflationary pressure (and rising inflationary expectations) needs to be checked,” the State Bank of Pakistan (SBP) said in a statement.
Average headline inflation during the first four months of the fiscal year 2018/19 (July-June) rose to 5.9 percent compared to 3.5 percent in the corresponding period last year.
“This trend is even more pronounced for core inflation, which indicates growing inflationary pressures in the economy,” the SBP said, adding that consumer price inflation is forecast to average 6.5-7.5 percent in 2018/2019, above its target rate of 6 percent.
The bank has now hiked rates by more than 4 percentage points since January in a bid to ease widening current account pressures that threaten to trigger a balance of payments crisis.
Pakistan is also currently holding bailout talks with the International Monetary Fund (IMF), though these have been delayed.
SBP said economic growth will ease to “slightly above 4 percent” in the year to end of June 2019, revising down its September estimate of 5 percent. Last fiscal year the economy expanded 5.8 percent, the highest rate in more than a decade.
Earlier on Friday, Pakistan’s rupee currency plunged more than 6 percent before paring some of the losses in what dealers said was the sixth currency devaluation by the central bank.
Reporting by Drazen Jorgic; Editing by Robin Pomeroy, Richard Balmforth