Business | Markets
Pakistan raises key rate to control inflation pressure
Power and food costs add to cost of living
- Bloomberg
- Published: 00:00 August 1, 2010
Islamabad : Pak-istan's central bank unexpectedly increased its benchmark interest rate for the first time in four meetings from 12.5 per cent to 13 per cent as power and food costs add to inflationary pressures.
Pakistan, which has one of the world's highest benchmark rates, joins Asian economies from India to Malaysia in raising borrowing costs as the region leads the global economic recovery.
The move comes even as Pakistan Prime Minister Syed Yousuf Raza Gilani's government stresses the need for low borrowing costs to support economic growth.
Tightening policy
"Government borrowings and expected pressure from tariff and commodity prices may have convinced central bank to tighten the policy," Asad Farid, economist at AKD Securities Ltd. in Karachi, said before the announcement.
Inflation in June stood at 12.69 per cent in Pakistan. Average inflation in the year starting July 1, may be as high as 12 per cent, Anwar said.
"There are risks to the inflation outlook," he said Friday. "Persistent energy shortages and poor law and order are adding to the problems."
The World Bank said last month South Asian economies including Pakistan need to raise borrowing costs to contain inflation.
Pakistan raised power rates by 7.6 per cent on July 1, an increase that took effect retrospectively in April, to meet a condition set by the International Monetary Fund for an $11.3 billion (Dh41.49 billion) bailout.
Food prices may also increase this month as demand rises during Ramadan.
"Power tariff rise and food prices may increase the pace of price gains," AKD's Farid said.
Higher borrowing costs may hurt companies including Engro Corp. and D.G. Khan Cement Co. which has taken loans to expand their businesses.
The government expects the South Asian economy to grow 4.5 per cent in the year that started July 1, the fastest pace in three years.
The nation's fiscal deficit target of 4 per cent of gross domestic product "seems challenging," Anwar said. It may reach 5 per cent in the year that started July 1.
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