Pakistan's central bank raised its monetary policy rate for the fourth time this year, saying "further consolidation efforts are required to ensure macroeconomic stability" as the current account deficit remains high, real interest rates have fallen while oil price shocks, protectionist trade policies and falling capital flows to emerging markets pose challenges to macroeconomic management.
The State Bank of Pakistan (SBP) raised its key rate by 100 basis points to 8.50 percent and has now raised its by a total of 275 basis points following earlier hikes in July, May and January.
SBP raised its forecast for inflation in the current 2019 fiscal year and lowered its forecast for economic growth.
Despite a positive impact on business and consumer confidence from the "smooth transition" to Imran Khan as prime minister following July elections, SBP said economic concerns persist "on the back of rising inflation and large twin deficits, that are likely to compromise the sustainability of the high real economic growth path."
Pakistan's headline inflation rate was largely steady at 5.84 percent in August from 5.83 percent in July, but it was still the highest in almost 4 years, or since September 2014.
In the first two months of the current 2019 fiscal year, which began July 1, headline inflation averaged 5.8 percent, up from 3.2 percent in the same months last year and 3.9 percent on average during fiscal 2018, SBP said.
"The jump is even more pronounced in core inflation - a key measure reflecting the underlying inflationary pressures in the economy," the central bank said.
SBP revised upwards its forecast for headline inflation to average 6.5 to 7.5 percent in fiscal 2019 from July's forecast of 6.0 to 7.0 percent.
The upward revision reflects higher than expected oil prices, higher domestic gas prices, further increases in import duties and second round impacts of previous exchange rate depreciations.
In addition to rate hikes this year, the SBP has devalued the rupee four times since December 2017 in a move seen as slowing down the decline in foreign exchange reserves.
The latest devaluation was on July 16 and the rupee fell 5 percent to 128 per U.S. dollar on July 17. Since then the rupee has firmed slightly to trade at 124.5 today.
Prior to the first devaluation on December 8, the rupee was trading around 105 to the U.S. dollar which means it has depreciated some 17 percent since then.
After strong growth of 5.8 percent in fiscal 2018, up from 5.4 percent the year before, economic activity this year is likely to slow as domestic demand decelerates from fiscal consolidation and the central bank's rate hikes work their way through the economy.
SBP lowered its forecast for growth in fiscal 2019 to around 5.0 percent from July's 5.5 percent.
The central bank also said the current account deficit "continues to pose a challenge.
Despite growth in remittances from abroad and exports in July and August, the rise in the value of oil imports widened the current account deficit to US$2.7 billion as compared with $2.5 billion in the same year-ago period despite non-oil imports declining, SBP said.
In August Pakistan's imports were 2-1/2 times as large as exports, resulting in a 14 percent rise in the trade deficit in August from the same month last year.
In the second quarter of calendar 2018, the current account deficit grew to US$5.798 billion, or 8.2 percent of Gross Domestic Product, up from $4.109 billion in the first quarter and a deficit ratio of 5.3 percent.
Pakistan's total foreign exchange reserves have been declining since October 2016 and hit US$15.521 billion as of Sept. 19, according to the SBP, down 35 percent since then and down 5 percent since 16,370 billion in August.
