The State Bank of Pakistan raised its policy rate by 150 basis points to 12.25% from 10.75%, effective May 21, citing inflationary pressures, recent currency depreciation and potential adjustments in utility tariffs.
The decision comes after Pakistan reached a $6 billion bailout program with the International Monetary Fund last week.
For the period between July 2018 and April 2019, the average headline consumer price index climbed 7.0%, compared with 3.8% for the same period a year prior, the central bank noted. Annual inflation was 9.4% in March 2019 and 8.8% in April 2019, on a year-over-year basis.
"Inflationary pressures are likely to continue for some time," the central bank noted.
It expects headline inflation to be in the range of 6.5% to 7.5% for fiscal year 2019, and to surge further the following year.
Since March-end, the exchange rate depreciated 5.93% to 149.65 Pakistani rupees against the U.S. dollar, said the central bank, adding that it will take measures, as needed, "to address any unwarranted volatility in the foreign exchange market."
The current account deficit narrowed to $9.6 billion in the July 2018 through March 2019 period, from a deficit of $13.6 billion during the same period a year prior, but reserves are below the standard level.
"Deep structural reforms" are required to improve the trade balance, according to the bank.
The Pakistani central bank projects economic growth to slow in fiscal 2019 due to subdued growth in agriculture and industry, but pick up from there owing to a rebound in the agriculture and export-oriented sectors. It also expects "improved market sentiment" following the IMF deal.