Pakistan Unexpectedly Holds Key Rate After Currency Devaluation

(Bloomberg) -- Pakistan's central bank unexpectedly left its benchmark interest rate unchanged after a second currency devaluation in four months.

The target policy rate will stay at 6 percent, the State Bank of Pakistan said in a statement on Friday. The move was predicted by only three of 22 economists in a Bloomberg survey with rest expecting a hike. The central bank unexpectedly moved interest rates up 25 basis points in January, the first increase in more than four years.

“Recent adjustments stemming from greater exchange rate flexibility, active monetary management as well as visible improvements in exports and remittances are expected to bear fruit” for medium-term economic growth “without posing a risk to stability,” the State Bank said in the statement.

The decision to hold follows a currency devaluation this month, the second since December, as dollar reserves decline the most in Asia and as Pakistan's current account deficit has risen by 50 percent in the eight months ended February. Inflation though has been relatively subdued at 3.8 percent in February, its lowest rate since October.

‘Posing Risks'

“Pakistan's currency drop has seen many retailers increase prices, but inflation is still under control,” Yawar uz Zaman, a senior analyst at Karachi-based Shajar Capital Pakistan Pvt, said before the decision. “Besides, you wouldn't want to hamper growth completely.”

Pakistan's government will announce its annual budget next month before completing its five-year term and the elections planned for July or August. Some analysts have pointed to Pakistan's growing debt, shrinking reserves and deteriorating external position as proof that Islamabad will need to turn to the International Monetary Fund or China, which is financing about $60 billion of infrastructure investments across the country, for financial support.

“Tighter monetary, fiscal policy and a weaker rupee are needed to narrow the growing current account gap, posing risks to consumer and investor sentiment,” Bilal Khan, a senior economist at Standard Chartered Bank in Dubai, said in a report this week. “Policy makers have been able to avoid such policy steps so far due to relatively easy financing from the capital markets. This may face challenges over the course of 2018.”

Standard Chartered revised its growth forecast for Pakistan downward this week and now expects it to slow to 4.8 percent in the year starting July after a 5.5 percent rise in the current fiscal year.

To contact the reporter on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net.

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Chris Kay, Khalid Qayum

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