Pakistan Increases Key Rate to 13% to Slow Inflation

By Khalid Qayum and Farhan Sharif

July 29 (Bloomberg) -- Pakistan's central bank increased its benchmark interest rate for a third time this year to tame inflation running at the fastest pace in three decades.

The State Bank of Pakistan raised the discount rate at which it lends to commercial banks to 13 percent from 12 percent, Governor Shamshad Akhtar told reporters today in Karachi. The move was predicted by six of seven analysts in a Bloomberg News survey, with one expecting an increase of 150 basis points.

``Inflationary pressures are more alarming than ever before,'' Akhtar said while releasing the central bank's semi- annual monetary policy statement. ``Global crude and commodity prices have induced recessionary trends in global economies. Pakistan is no exception.''

Pakistan joins neighboring India in increasing rates today, as central banks across Asia grapple with soaring prices and slowing economic growth. Higher borrowing costs in Pakistan may further weaken South Asia's second-largest economy, where last year's growth of 5.8 percent was the weakest since 2003.

``The inflationary pressures are mainly caused by high food and oil prices so the increase in interest rates may not help in controlling inflation effectively,'' said Habib-ur-Rehman, who manages the equivalent of $83 million in stocks and bonds at Atlas Asset Management Co. in Karachi. ``But it will slow down the economy.''

Consumer prices in Pakistan jumped 21.53 percent in June from a year earlier, after gaining 19.27 percent in May. The central bank is aiming to keep average inflation at 12 percent in the fiscal year that started July 1, the same as the previous 12-month period.

Declining Stocks

Pakistan's stocks fell for a second day today on fears an increase in interest rates may hurt company profitability. The benchmark Karachi Stock Exchange 100 index dropped 1.2 percent to 10,448.19 at the 2:15 p.m. local time close.

Inflation may accelerate further after the government raised domestic fuel prices by as much as 15.2 percent on July 21, the sixth increase in five months, in line with global oil costs. Crude reached a record $147.27 a barrel on July 11.

The central bank unexpectedly increased the benchmark rate by 1.5 percentage points to 12 percent on May 23, also raising the cash reserve requirement for commercial lenders to 9 percent of deposits from 8 percent.

Central banks in Indonesia, Thailand and the Philippines have all increased interest rates in the past month. Neighboring India today raised its benchmark repurchase rate for a third time in less than two months to 9 percent.

`Totally Unsustainable'

Pakistan's inflation rate is also being stoked by government borrowings from the central bank, estimated at 9 percent of gross domestic product last fiscal year.

``Government borrowing is totally unsustainable,'' Akhtar said. ``It had never reached the level it has reached today.''

The central bank has advised the government to retire 21 billion rupees ($290 million) of debt every quarter this fiscal year, she said.

The budget deficit widened to 8.3 percent of GDP in the 12 months to June 30, the central bank said today. That's the highest since 1991 when it reached 8.8 percent, according to finance ministry web site.

Pakistan's first civilian government since a 1999 military coup says it wants to narrow the gap to 4.7 percent of GDP next fiscal year.

That target ``has already come under stress,'' Akhtar said, adding that the government has already borrowed 32.9 billion rupees from the central bank in the 25 days to July 25. ``The government tends to underestimate expenditures and overestimate revenue,'' she said.

Standard & Poor's and Moody's Investors Service in May lowered their ratings on Pakistan's foreign-currency debt, citing widening budget and current-account deficits and political instability.

To contact the reporters on this story: Khalid Qayum in Islamabad, Pakistan at kqayum@bloomberg.net. Farhan Sharif in Karachi, Pakistan at Fsharif2@bloomberg.net.