Pakistan’s central bank kept its main interest rate at 13.25 percent on Friday, having recently stopped hiking rates as data on the economy has begun to show that inflation is steadying.
The bank said it expected inflation to ease in the second half of the fiscal year to the end of next June and remain broadly unchanged in fiscal 2020 at 11 percent to 12 percent.
Furthermore, the current account balance, the broadest measure of the country’s trade with the rest of the world, turned to a surplus in October for the first time in four years, the bank said, meaning external pressure on Pakistan’s finances is receding. “The market sentiment has begun to gradually improve on the back of sustained improvements in the current account and continued fiscal prudence,” the statement said.
“In the first four months of the current fiscal year, the current account deficit contracted by 73.5 percent to US$ 1.5 billion,” it added.
It said the government’s primary balance - the balance of revenue versus spending excluding debt-servicing costs - is likely to enter a surplus in the first quarter of next fiscal year for the first time in almost four years.
“This, together with the end of deficit monetization has qualitatively improved the inflation outlook.” The bank last lifted rates in July, when it hiked by 100 basis points. It was the ninth increase since the start of 2018 as the country faced rising inflation, a big current account deficit and downward pressure on its rupee currency.
The International Monetary Fund is currently reviewing Pakistan’s progress on reforms agreed as part of a bailout package in July. Under the terms of the $6 billion bailout, the government has put in place tough measures to meet a fiscal deficit target set by the IMF.
The rupee has appreciated 5.6 percent since hitting a low in June, and inflation stood at 11 percent year-on-year and 1.8 percent month-on-month in October.
The bank said it expected inflationary pressures to ease in the second half of this fiscal year.