Pakistan seeks to skirt crisis with biggest rate hike since 1996

Pakistan’s central bank raised interest rates by 250 basis points (bps) following an emergency meeting, as escalating political chaos at home and higher global oil prices threaten to spill over into a fullblown economic crisis.

The key rate now stands at 12.25 per cent, State Bank of Pakistan said in a statement on Thursday. This makes the real rate “mildly positive” and will help preserve external and price stability, it said.

“Heightened domestic political uncertainty” contributed to a 5 per cent depreciation in the rupee, triggered a surge in local bond yields as well as Pakistan’s Eurobond yields and CDS spreads,” the central bank said. Oil prices will probably stay high and the US Federal Reserve is also likely to tighten quicker than previously anticipated, it added.

“We thought it’s important to take decisive action,” Reza Baqir, Pakistan’s central bank governor, said at a subsequent briefing. The authority “is not planning to do anything more,” he added.

The extra yield investors demand to hold Pakistan’s sovereign debt, on average, over US Treasuries widened by 8 basis points on Thursday to 10.73 percentage points, according to JPMorgan Chase & Co. data, just above the 10-percentage point threshold for distressed debt. The rupee dropped 1.1 per cent, most in two years, to a record low of 188.18 a dollar Thursday.

Pakistan’s political situation is also contributing to delays in a planned $1-billion green bond sale.