Pakistan holds steady on rates after fiscal tightening

KARACHI, Jan 24 (Reuters) – Pakistan’s central bank held its benchmark interest rate at 9.75% on Monday and signalled that borrowing costs would remain steady for now as recent tax increases were expected to curb demand and reduce the country’s budget deficit.

“There’s no need for further tightening at the moment because of the government’s fiscal policy,” State Bank of Pakistan Governor Reza Baqir told a news conference in Karachi.

He said a mid-year budget passed this month which ended exemptions on sales tax would reduce the fiscal deficit and moderate demand. Pakistan’s finance minister has said the tax changes would raise $1.9 billion. read more

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“The MPC (Monetary Policy Committee) was of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5%-7%, support growth, and maintain external stability,” the central bank said in statement announcing its rate decision.

The bank also cut its projection for gross domestic product (GDP) for the 2022 financial year which ends on June 30 to about 4.5% from 5% previously.

“If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest,” it said.

The governor said that while headline inflation would continue to remain high “in the near-term” due to elevated global commodity prices, its momentum was slowing.

The central bank said inflation was expected to decline during the 2023 fiscal year towards its medium-term target faster than previously expected due to the government’s fiscal policy and a moderation in economic activity.

The bank raised rates by 275 basis points between September and December to tackle a falling Pakistani rupee, high inflation and a current account deficit. It signalled in December it was probably close to being done with increases in the near-term.

Baqir also said that the current account deficit was stabilising and remained projected at about 4% of GDP.

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Reporting by Syed Raza Hassan and Gibran Naiyyar Peshimam in Karachi; Additional reporting by Swati Bhat; Writing by Charlotte Greenfield; Editing by Peter Graff, William Maclean and David Clarke

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