Pakistan's central bank decided to raise its policy rate by 50 basis points to 6.50%, effective May 28, saying the nation's balance of payments and fiscal deficit are adversely affecting macroeconomic stability.
The State Bank of Pakistan said Pakistan's economic growth is estimated to reach a 13-year high of 5.8% in fiscal 2018, while headline inflation is expected to stay below the annual target of 6.0%.
The central bank, however, said the country's balance of payments further deteriorated, despite export gains and an import slowdown, due to a sharp increase in international oil prices and limited financial inflows. In addition, Pakistan's fiscal deficit was revised up to an estimated 5.5% of GDP, from an initial target of 4.1%.
Headline CPI inflation averaged 3.8% in the first ten months of fiscal 2018, while core inflation in the last two months rose to 6.4% year over year.
"A significant change in the outlook for international oil prices with its impact on upward adjustments in domestic oil prices, a strong demand, the lagged pass-through of exchange rate adjustments, food inflation maintaining its current course and the stoking of survey-based measures of inflationary expectations will largely determine the inflation path in the remaining period of FY18 and for FY19," the central bank said.
The bank added that average inflation is estimated to remain within the model-based range of 3.5% to 4.5% in fiscal 2018 then rise marginally above the 6% annual target in fiscal 2019.
