KARACHI, Pakistan (Reuters) - Pakistan’s central bank on Friday raised interest rates by 25 basis points, its first change since May 2016, to offset inflationary pressures in the wake of the local currency’s depreciation and a spike in global oil prices.
The State Bank of Pakistan (SBP) effectively devalued the rupee by about 5 percent against the dollar last month, while global oil prices have risen to near $70 per barrel.
SBP governor Tariq Bajwa said the expectation that other major central banks around the world would raise rates was also among key reasons that prompted the SBP to raise rates, which stood at record-low level of 5.75 percent since May 2016.
“Multiple indicators show that output gap has significantly narrowed on demand pressures,” Bajwa told a news conference in the port city of Karachi.
“Based on these developments MPC is of view that in order to preempt overheating of the economy and inflation reaching its target rate, this is the right time to make a policy decision that would balance growth and instability,” he added.
Pakistan’s economy is growing by more than 5 percent a year - the fastest rate of expansion in a decade - but the country’s macro-economic outlook has been strained due to balance of payments pressures and a ballooning current account deficit.
While exports have picked up in recent months and the growth rate of imports has slowed, economists say more needs to be done to avert a future balance of payments crisis and help rebuilt depleting foreign currency reserves.
Pakistan also remains vulnerable to external shocks such as a spike in energy prices, which has long been the Achilles heel of Pakistan’s economy.
In recent years Pakistan’s economy has benefited from improved security across the country and vast Chinese infrastructure investment after Beijing pledged $57 billion as part of its Belt and Road initiative.
Reporting by Syed Raza Hassan; writing by Drazen Jorgic