SBP signals extended pause on interest rate hikes

KARACHI: Pakistan must balance the risk of a slowing economy with its desire to lower the inflation rate, its central bank governor Reza Baqir said, signaling an extended pause in the interest rate-hike cycle.

The “balance of risks” is shifting as the pace of economic growth slows, Baqir said in an interview with Bloomberg in Washington. The South Asian nation currently has among the highest real rates -- that’s adjusted for inflation -- in Asia after more than doubling borrowing costs to 13.25 percent since the start of 2018.

The State Bank of Pakistan last month kept interest rates unchanged for the first time in more than a year after inflation then showed signs of steadying following a change in calculation methodology. Consumer prices have since accelerated above 11 percent, even as economic expansion is seen slowing.

The Asian Development Bank lowered its fiscal 2019 growth forecast for Pakistan to 3.3 percent from 3.9 percent previously, amid a broader slowdown in the global economy. That’s lower than the central bank’s projection of 3.5 percent growth in the full-year ending June 2020, and compares with a 5.5 percent expansion in 2018.

Under Baqir, Pakistan is looking to stabilize its economy after suffering from a deficit blowout with the most aggressive rate hikes in Asia and multiple currency devaluations since November 2017. The rupee is down almost 50% against the dollar this year, one of the world’s worst-performing currencies, as the central bank introduced more flexibility to the managed-float system.

Recently global investors are piling into Pakistan’s local-currency bonds like never before. Attempts at economic reforms, support from the International Monetary Fund and interest rates topping 13 percent make the nation’s fixed income attractive amid a surge in the world’s pool of negative-yielding debt. Small wonder foreigners bought $342 million of debt in the quarter through September, compared with virtually zero inflows in the past two years, according to central-bank data going back to 2015.

Other key points from the governor’s interview and presentation: Inflation outlook didn’t change enough in September to merit an interest-rate cut, but inflationary pressures will probably recede in coming months.

Baqir said in a presentation at the Institute of International Finance’s annual meeting that devaluations make the exchange-rate more market-based. Pakistan must raise its savings rate to escape the endless cycle of International Monetary Fund deals. Pakistan values friendship with China, but wants to build more alliances.