KARACHI, May 23: The rupee firmed 1.2 per cent against the dollar on Friday, pulling away from a record closing low set this week, after the central bank raised interest rates sharply to tackle inflation.

The rupee closed at 68.40/50 to the dollar, compared with Thursday’s close of 69.25/45 and the record closing low of 69.60/90 on Tuesday. It has fallen 11 per cent against the dollar this year.

The State Bank of Pakistan raised its discount rate to 12 per cent from 10.5 per cent on Thursday to counter fiscal and current account deficits as well as inflation, which hit 17.2 per cent in April, the highest level since the mid-1970s.

However, analysts said the impact might be limited.

“Short-term risks are unlikely to ease because inflationary risk is more global than local,” said Muzzamil Aslam, an economist at KASB Securities Ltd.

“But second-round inflation due to speculative activity and hoarding will be contained.” The central bank also increased the cash reserve requirement (CRR) — the ratio of cash that banks must park with it — to 9 per cent from 8 per cent for deposits and time liabilities of less than a year. The CRR for deposits of one year and above will remain zero-rated.

The statutory liquidity requirement, which sets the proportion of assets banks must hold in liquid assets such as government bonds, was increased to 19 per cent from 18 per cent.

The central bank governor said the monetary tightening and moves to limit government borrowing from the central bank should help stabilise the rupee.

The principal reasons for its weakness have been the sharp deterioration in the current account because of rocketing prices for imported oil, runaway import demand and dwindling foreign capital inflows, due in part to political uncertainty.

The central bank expects the average inflation rate for 2007-08 to be 11 per cent, way above a target of 6.5 per cent.—Reuters