Pakistan seeks to circumvent crisis with biggest rate hike since 1996
Pakistan’s central bank raised interest rates by 250 basis points (bp) following an emergency meeting, as political chaos escalated in the country and global oil prices rose. threaten to turn into a full-fledged economic crisis.
The key rate now stands at 12.25%, the State Bank of Pakistan said in a statement on Thursday. This makes the real rate “slightly positive” and will help preserve external and price stability, he said.
“Increased domestic political uncertainty ‘contributed to a 5% depreciation of the rupiah, triggered a spike in local bond yields as well as Pakistani Eurobond yields and CDS spreads,’ the central bank said. Oil prices are likely to remain high and the US Federal Reserve is also expected to tighten faster than expected, he added.
“We thought it was important to take decisive action,” Reza Baqir, governor of Pakistan’s central bank, said in a later briefing. The authority “does not provide for anything more”, he added.
The extra yield demanded by investors to hold Pakistan’s sovereign debt, on average, relative to US Treasuries widened 8 basis points on Thursday to 10.73 percentage points, according to data from JPMorgan Chase & Co., just above the 10 percentage point threshold for distressed debt. The rupee fell 1.1%, the most in two years, to a record high of 188.18 to the dollar on Thursday.
Pakistan’s political situation is also contributing to delays in the planned sale of $1 billion green bonds.