Pakistan May Raise Key Rate After Inflation Hits 30-Year High

By Khalid Qayum and Farhan Sharif

July 29 (Bloomberg) -- Pakistan's central bank may increase its benchmark interest rate for an eighth time since 2005 after inflation accelerated to a 30-year high.

State Bank of Pakistan will raise its discount rate by 1 percentage point to 13 percent, according to six out of seven analysts in a Bloomberg News survey. One expects an increase to 13.5 percent. The policy statement is due today at about 4 p.m. local time in Karachi.

``Inflation seems to be heading toward an all-time high,'' said Suleman Akhtar, an economist at Foundation Securities Ltd. in Karachi. ``The central bank and the government will do everything to reduce inflation. The impact of current oil prices and high commodity prices pose a challenge.''

Central banks across Asia are raising borrowing costs as soaring food and energy prices stoke inflation and spark protests from the region's poor. Higher rates in Pakistan may further weaken South Asia's second-largest economy, where last year's growth of 5.8 percent was the slowest since 2003.

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

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.

Unexpected Move

Governor Shamshad Akhtar 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 is today expected to raised its benchmark repurchase rate for a third time in less than two months to 8.75 percent, according to 16 of 22 economists in a Bloomberg News survey.

Pakistan's central bank in June said government borrowing from the State Bank, estimated at 9 percent of gross domestic product last fiscal year, ``cannot be sustained'' without further stoking inflation.

The budget deficit reached a 10-year high of about 7 percent of GDP in the 12 months to June 30, according to Finance Minister Naveed Qamar. 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.

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

The following table shows forecasts from Pakistan's benchmark interest rate in percentage terms:

Contributor Key Rate

First Capital Equities 13.5
Invest Capital & Securities 13
Invisor Securities 13
Foundation Securities 13
Atlas Capital 13
KASB Securities 13
Aziz Fiddahusein & Company 13

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.