Pakistan unexpectedly raised interest rate to stop inflation spiral

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Pakistan unexpectedly raised its benchmark interest rate by a full percentage point to prevent stronger-than-anticipated inflation from spiraling out of control.

State Bank of Pakistan increased the target rate to 16 percent on Friday, a move expected by just one of 44 economists in a Bloomberg survey while the rest had predicted no change.

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The authority also raised its annual inflation forecast to 21 percent-23 percent from about 18 percent-20 percent.

“Inflationary pressures have proven to be stronger and more persistent than expected,” the central bank said in a statement.

The tightening “is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” it said.

Higher interest rates add another layer of complexity to the challenges facing the South Asian nation, which is still to fully assess the damage from devastating floods.

The delay is also holding up a loan disbursal from the International Monetary Fund. Meanwhile ex-premier Imran Khan is holding street rallies to force early elections.

In the short term, the economic outlook looks bleak. Pakistan’s foreign exchange reserves cover about one month of imports, less than the IMF’s three-month benchmark. Inflation rose more than expected to about 26.6 percent in October.

The rupee could weaken by 10 percent in the coming months, according to Mackay Shields UK LLP and Tellimer Ltd.

The nation is arranging funds and plans to repay a $1 billion sukuk bond on December 2, central bank Governor Jameel Ahmad said at a briefing Friday. He said repayment needs in the year started July 1 total about $25 billion, with most of it rolled-over or paid.

Ahmad added that the SBP will monitor price pressures.

“Amid the ongoing economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs,” the SBP said. “In turn, these shocks are spilling over into broader prices and wages.”

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