Pakistan price spiral ties up rate relief option

Islamabad: Pakistan’s inflation accelerated to a 10-month high in May, limiting the central bank’s scope to cut interest rates to bolster a struggling economy.

Consumer prices rose 12.29 per cent from a year earlier, the Bureau of Statistics said in Islamabad on Saturday, compared with 11.27 per cent in April and the median 11.23 per cent estimate in a Bloomberg News survey of six economists.

Pakistan has struggled to contain the fastest inflation in Asia, adding to challenges from power blackouts and an insurgency on the Afghan border.

“The rise in inflation will narrow room for any cut in the discount rate in the near term,” Sulaiman Akhtar, an economist at Foundation Securities in Karachi, said before the release. “There may be an easing in prices going forward, but government borrowing and the fiscal deficit will keep the central bank from lowering borrowing costs.”

The State Bank of Pakistan left its benchmark discount rate unchanged at 12 per cent in April for a third straight meeting, after cutting it by 2 per centage points last year. The government’s inflation goal for the 12 months starting July 1, 2012 is 9.5 per cent.

Earlier, Pakistan’s rupee sank to its lowest level against the dollar, as the central bank denied that it would have to return to the International Monetary Fund (IMF) for assistance.

Amid panic in Pakistan’s fragile forex market, the rupee slid 0.9 per cent to 93.8350 per dollar, a record low, according to Malek Bostan, president of the Forex Dealers’ Association.

In an interview published in The Wall Street Journal, bank governor Yaseen Anwar was quoted as saying the government’s failure to control the deficit could make it difficult to meet the more than $4 billion (Dh14.68 billion) in IMF loans due in the fiscal year starting July 1.

“This statement created havoc in the market, causing a drop of 1.3 per cent in the rupee’s value against the dollar in two days,” Mohammad Suhail, of Topline Research, said.

The State Bank of Pakistan moved to play down any concerns.

“The decline in our projected reserves will be partially offset by an increase in remittances, which will exceed $13 billion this fiscal year,” Anwar said.

“Additional foreign direct investment [is] in the pipeline that includes US company investments in the power sector.”