The State Bank of Pakistan (SBP) raised its key interest rate by 50 basis points to 10.75 per cent on Friday, citing continuing inflationary pressures and a high fiscal and current account deficit.
The central bank said pressure on foreign exchange reserves had eased since the last meeting of the monetary policy committee in January, with improved stability on financial markets and better business confidence.
“Nonetheless, despite narrowing, the current account deficit remains high, fiscal consolidation is slower than anticipated, and core inflation continues to rise,” it said in a statement announcing the decision.
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The move, just days after the SBP cut its 2019 growth forecast to between 3.5 and 4pc, underlines the pressure the managers of the cash-strapped economy face to tighten monetary policy as the government seeks a bailout from the International Monetary Fund.
The economy has faced increasing headwinds, with ratings agency Standard and Poor's cutting its sovereign rating to 'B-' from 'B' last month, citing diminished growth prospects as well as external and fiscal stresses.
The SBP noted that consumer price inflation, which reached 6.5pc in the July-February period, hit 8.2pc in February, the highest annual increase since June 2014.
It said the current account deficit narrowed to $8.8 billion in the first eight months of the 2019 fiscal year, compared to a deficit of $11.4bn during the same period last year — a fall of 22.6pc.
The fall was driven by a narrowing in the trade deficit through a reduction in imports and a rise in remittances from overseas Pakistanis, while exports remained flat.
Exports have lagged despite a sharp weakening in the value of the rupee, which has lost about a quarter of its value in the past year.
The country's chronically strained foreign exchange reserves improved somewhat, rising to $10.7bn as of this week, helped by funds booked from funding agreements with Saudi Arabia and the United Arab Emirates.
However the fiscal deficit, which IMF projections forecast will approach 7pc of gross domestic product this year, widened further and the central bank said the fiscal defict target for the current year would be breached.