Pakistan Keeps Interest Rate at 12%, Inflation Concerns Remain

Islamabad, Mar 10 (PTI) Pakistan's central bank on Monday announced to keep the policy rate unchanged at 12 per cent while citing possibility of a temporary rise in inflation in the coming months.

The State Bank of Pakistan (SBP) announced its decision on the basis of recommendation made by its Monetary Policy Committee (MPC) while noting that inflation in February turned out to be lower than expected, mainly due to a drop in food and energy prices.

"At its meeting today, the committee decided to keep the policy rate unchanged at 12 per cent," the bank announced.

“Notwithstanding this decline (in February), the committee assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation,” the bank said in a notification.

At the same time, core inflation is proving to be more persistent at an elevated level, and thus an uptick in food and energy prices may lead to an increase in inflation, it stated in its latest policy review.

The committee also noted that economic activity is showing signs of improvement as reflected in recent high-frequency indicators. However, concerns remain regarding external account pressures due to rising imports and weak financial inflows.

"On balance, the MPC assessed the current real interest rate to be adequately positive on a forward-looking basis to sustain ongoing macroeconomic stability," it added.

The decision comes at a time when an International Monetary Fund (IMF) delegation is in Pakistan to assess the USD 7 billion bailout programme, including discussions on revenue targets and taxation measures that may impact inflation and monetary policy.

The SBP since June 2024 has reduced the policy area by 10 per cent and it was expected to further reduce it gradually during the latest periodic review.

February inflation stood at a near-decade low of 1.5 per cent, largely due to a high base a year ago but the core inflation remains high, while the current account deficit is widening, prompting the SBP to be more cautious in cutting down the interest rate any further.