The State Bank of Pakistan (SBP), the country's central bank, on April 7 announced a 250 basis points hike in the benchmark interest rates, taking it to 12.25 percent.
The decision was taken by the SBP at an emergency meeting of the monetary policy committee (MPC) called earlier in the day.
"Since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen," the central bank said in a statement, adding that "heightened domestic political uncertainty" has contributed to a 5 percent depreciation in the Pakistani rupee.
This, in addition to a number of external factors including the Russia-Ukraine conflict and the tightening of fiscal policy by the US has compelled the MPC to revise the key lending rate which stood at 9.75 percent before the meeting, the SBP said.
"The MPC noted that the above developments necessitated a strong and proactive policy response. Accordingly, the MPC decided at its emergency meeting today, to raise the policy rate by 250 basis points to 12.25 percent. This increases forward-looking real interest rates (defined as the policy rate less expected inflation) to mildly positive territory," the statement said.
The SBP, citing the future markets, suggested that global commodity prices, including oil, are likely to remain elevated for longer and "the Federal Reserve is likely to increase interest rates more quickly" than previously anticipated.
"As a result of these developments, average inflation forecasts have been revised upwards to slightly above 11 percent in FY22 before moderating in FY23," it said, adding that the current account deficit is still expected to be around 4 percent of GDP in FY22.
The MPC was of the view that a "reduction in domestic political uncertainty and prudent fiscal policies" should help ensure that Pakistan’s robust economic recovery from COVID-19 remains sustainable, the central bank noted.