Pakistan May Keep Interest Rates Unchanged as Inflation Eases

By Khalid Qayum and Farhan Sharif

Jan. 30 (Bloomberg) -- Pakistan’s central bank may keep its benchmark interest rate unchanged at a decade high as inflation eases from a 30-year record.

State Bank of Pakistan will maintain its discount rate for commercial lenders at 15 percent, according to eight out of nine analysts in a Bloomberg News survey. The new central bank governor Salim Raza, who took charge on Jan. 2 replacing Shamshad Akhtar, is due to release his first semi-annual monetary policy statement in Karachi tomorrow.

“The central bank won’t change interest rates because inflationary and deficit pressures are receding,” said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. “The central bank will wait for a couple of months to confirm data that this trend is continuing before cutting interest rates by as much as 400 basis points by July to boost growth.”

Former governor Akhtar increased the discount rate four times last year to slow inflation and build Pakistan’s foreign- exchange reserves, hurting an economy that is predicted by the central bank to grow at the slowest pace in seven years.

The State Bank of Pakistan last raised the discount rate by 2 percentage points, the most in more than a decade, on Nov. 12. The increase was part of conditions for an International Monetary Fund loan.

South Asia’s second-biggest economy was forced to seek $7.6 billion funds from the IMF in November to avoid defaulting on its debt after its foreign reserves shrunk to $3.5 billion as of Nov. 1 from $14.2 billion a year earlier. Reserves climbed to $6.6 billion on Jan. 17 after the country received a $3.1 billion first installment of the IMF loan.

IMF Bailout

The central bank promised the IMF as part of the rescue package to raise borrowing costs if Pakistan’s foreign reserves drop too low.

Higher borrowing costs have helped tame inflation, which accelerated to near a three-decade high of 25 percent in October. Consumer prices increased 23.34 percent in December and inflation is forecast to average 22 percent in the fiscal year ending June 30, according to Dec. 6 central bank report.

Inflation may average around 19 percent this year, KASB’s Aslam said. “The incremental impact of any further rate hike is not going to be significant on inflation because commodity prices have already reduced,” he said.

Pakistan’s rupee plunged 22 percent in 2008, the current account deficit widened to a record and the fiscal deficit reached a 10-year high. The crisis mounted after the Pakistan Peoples Party-led government, which came to power in March, was paralyzed for almost six months on political wrangling.

Economic growth, which averaged 6.8 percent in past five years, is expected to weaken to 3.5 percent this fiscal year from 5.8 percent last year, the central bank has said.

Contributor                   Key Rate

BMA Capital                   Unchanged
Global Securities             Unchanged
Invisor Securities            Unchanged
JS Global Capital             Unchanged
Foundation Securities         Unchanged
KASB Securities               Unchanged
Invest Capital                Unchanged
AKD Securities                Cut by 1.5 percentage point
Atlas Capital                 Unchanged

For Related News and Information: Bloomberg stories on Pakistan’s economy: TNI PAK ECO BN Stories on Pakistan’s central bank: TNI PAK CEN For sovereign credit ratings CSDR