Pakistan central bank holds interest rate at 12%

ISLAMABAD: Pakistan’s central bank will keep its key policy rate at 12 percent for the next two months, it said, expressing concerns about inflation and heavy government borrowing.
The State Bank of Pakistan (SBP) last changed rates when it made a 150 basis point cut on Oct. 8, 2011, bringing the benchmark rate to its current level, among the highest in the region and well above the 8 percent in India.
“While managing the external and fiscal pressures remains more of an immediate concern, the real challenge lies in reviving private investment in the economy,” the State Bank of Pakistan said in a statement.
“Inflationary pressures have not subsided either despite sluggish GDP growth.”
The SBP said that inflation cannot be controlled unless the Pakistan government curbs its h eavy borrowing from the banking system, especially the central bank.
This bloats the nation’s money supply, while heavy government borrowing from commercial banks means these are less likely to lend to the private sector, which hobbles economic growth.
The central bank said it expects inflation to hover around its current level. Year-on-year CPI increased to 12.3 percent in May.
“Limiting and retiring budgetary borrowings from the banking system and implementation of consistent and credible policies would help in moving away from this undesirable equilibrium,” the SBP said.
Pakistan’s current account deficit stood at $ 3.4 billion in the first ten months of the current fiscal year, which runs from July to June, and the SBP estimates it is likely to remain around 1.7 percent of gross domestic product (GDP) when the full year’s data comes in.
The SBP projected a similar deficit in the 2012/13 fiscal year, but said that with increasing debt repayments, the economy needs “substantial external inflows to preserve our foreign exchange reserves.”
Pakistan’s foreign exchange reserves fell to $ 15.54 billion in the week ending May 25 from $ 16.01 billion the previous week.