Dubai: Pakistan's central bank unexpectedly left its benchmark interest rate unchanged even as inflation accelerated to the fastest pace in Asia.

The State Bank of Pakistan kept the discount rate at 14 per cent, Governor Shahid Kardar said in Karachi yesterday. The decision was predicted by only three of 17 economists in Bloomberg News survey. The rest forecast a half point increase.

Kardar, who blames Pakistan's above-15 per cent inflation rate on government borrowings, said the three rate increases announced since July are "crowding out" investment and curtailing growth. Prime Minister Yousuf Raza Gilani's economic team met with the main opposition last week to seek a consensus on ways to cut the nation's budget deficit and spur growth.

"If drastic improvements in government finances are not seen, the central bank will have to increase rates to control inflation," Mustafa Pasha, an economist at BMA Funds Ltd in Karachi, said before the announcement.

Pakistan's benchmark Karachi Stock Exchange KSE100 Index has gained 28 per cent since July 1. The Pakistani rupee declined 0.1 per cent to 85.63 (Dh3.67) against the US dollar during the period.

"The next rate announcement two months from now will depend on how the government tackles inflation and government borrowing," Kardar said yesterday.

Pakistan's $168 billion (Dh269.8 billion) economy is lagging behind as emerging markets from neighbouring India to China help lead the global economic rebound from the deepest postwar recession.

Political wrangling

Pakistan, already sapped by terrorism, was set back by floods in 2010, the worst in its 63-year history. The government forecasts the economy will expand 2.5 per cent in the year through June, slower than the original target of 4.5 per cent.

Any agreement with Gilani will require a 30 per cent cut in government spending, restructure state-owned money-losing companies, including Pakistan International Airlines Corp and Pakistan Steel Mills Corp, and set a new price mechanism for power and gas, Ahsan Iqbal, a spokesman for the opposition Pakistan Muslim League of former prime minister Nawaz Sharif, said on January 20.

Government borrowing more than doubled to Rs355 billion from July 1 to January 15, compared with a year earlier, according to the central bank.

The International Monetary Fund, which bailed out Pakistan with an $11.3 billion loan in November 2008, has urged it to cut subsidies and end tax exemptions.

Political wrangling within the ruling coalition forced Gilani to reverse an increase in fuel prices this month — a rollback also demanded by Sharif — and defer plans to tax more services.

Maria Kuusisto, analyst at consultant Eurasia Group, said Pakistan's budget shortfall may touch eight per cent of GDP, or Rs1.3 trillion in the year through June from 6.3 per cent the previous year. Consumer prices climbed 15.46 per cent in December from a year earlier.