Islamabad: Pakistan’s central bank raised its key interest rate by 150 basis points to 12.25 per cent on Monday, warning that soaring inflation was set to rise further on higher oil prices and reforms required for a bailout from the International Monetary Fund.

The increase follows a preliminary agreement last week with the IMF for a $6 billion (Dh22 billion) loan that is expected to come with tough conditions, including raising more tax revenues and putting up gas and power prices.

With economic growth set to slow to 2.9 per cent this year from 5.2 per cent last year, according to IMF forecasts, the rate rise adds to pressure on Prime Minister Imran Khan, who came to power last year facing a balance of payments crisis that has now forced his government to turn to the IMF.

Noting average headline inflation rose to 7 per cent in the July-April period from 3.8 per cent a year earlier, the central bank said recent rises in domestic oil prices and the cost of food suggested that “inflationary pressures are likely to continue for some time”.

It said the fiscal deficit was likely to have been “considerably higher” during the July-March period against the same period a year earlier due to shortfalls in revenue collection, higher interest payments and security costs.

Despite some improvements, financing the current account deficit remained “challenging” and foreign exchange reserves were below standard adequacy levels at less than the equivalent of three months of imports.

The central bank said it was watching foreign exchange markets closely and was prepared to take action to curb “unwarranted” volatility, after the sharp fall in the rupee over recent days that saw the currency touch a record low of 150 against the US dollar.

Details of what Pakistan will be required to do under the IMF agreement, which must still be approved by the Fund’s board, have not been announced but already opposition parties are planning protests.