Stock - Pakistani Rupee
Prior to Thursday’s decision, the State Bank of Pakistan had increased rates by 400 basis points since the start of the year. Image Credit: Bloomberg

Islamabad: Pakistan’s central bank raised borrowing costs more than expected to quell Asia’s second-fastest inflation and meet conditions for a loan from the International Monetary Fund.

State Bank of Pakistan lifted the target rate by 125 basis points to 15 per cent on Thursday. The hike aims “to moderate domestic demand, prevent a compounding of inflationary pressures and reduce risks to external stability,” the central bank said in a statement.

Inflation, due in part to pent-up demand, high global commodity prices and rising imports, surged to a 13-year high of 21.32 per cent in June. Pakistan’s central bank joins nearly 60 monetary authorities, including the Federal Reserve, in raising policy rates. Inflation during current fiscal year is forecast at around 18-20 per cent before declining sharply in the next fiscal and the economy is predicted to grow at 3-4 per cent, the central bank said.

The move also comes as authorities inch closer to a staff agreement with the the multilateral lender for a bailout. Pakistan needs around $41 billion to ease its worsening finances and funds from the Washington-based lender pave the way for more aid from other friendly nations. Authorities have reversed energy subsidies, raised power tariffs and unveiled a slew of austerity measures to win IMF’s support. The moves “will ensure that tail risks associated with meeting Pakistan’s external financing needs are averted,” the central bank said.