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ISLAMABAD, Pakistan, The State Bank of Pakistan (SBP), has raised its key discount rate by 25 basis points to six percent, the first increase in four years.

The Pakistani central bank had been sustaining its policy rate at 5.75 percent for the last one and a half years. It had reduced the key interest rate by 25 basis points in May, 2016. The State Bank had revised upward, its benchmark interest rate by 50 basis points in Nov, 2013.

Pakistan State Bank Governor, Tariq Bajwa, cited the recent slump in the value of Pakistani rupee against the greenback, as the main catalyst behind the raised interest rate.

Fahad Qasim, at Topline Research informed that, the shift in the monetary policy stance, might be due to the depreciation of the Pakistani rupee and higher inflation expectations, as well as, the country's deteriorating balance of payment.

He further stated that, the five percent currency devaluation in Dec, was the first phase, while the second phase of a similar magnitude is expected in the second half of Financial Year 2018. The second phase might leave Pakistani rupee at 115 rupees against the U.S. dollar by Jun, 2018, which would be a 10 percent decline in its value in the FY18, he added.

During Dec, 2017, inflation surged by 4.7 percent, thereby reducing real interest rates to one percent, as compared to the last two years average of 1.9 percent, he said, adding that, inflation is expected to pick up further, on account of rising oil prices and currency devaluation.

It is important to mention here that Pakistan's current account deficit stood at 7.4 billion U.S. dollars, as against 4.7 billion U.S. dollars recorded during the same period last year. The current account deficit is likely to be at around 14 billion U.S. dollars at the end of the ongoing fiscal year, which would be higher than last fiscal year's current account deficit of 12 billion U.S. dollars.

Four key factors of Pakistan's economy have witnessed important changes since Nov, 2017, impinging upon the policy rate decision, the State Bank governor said in a statement.

"Firstly, Pakistani rupees has depreciated by around five percent. Secondly, oil prices are hovering near 70 U.S. dollars per barrel. Thirdly, a number of central banks have started to adjust their policy rates upwards, adversely affecting Pakistani rupee interest-rate differentials vis-a-vis their currencies. Fourthly, multiple indicators show that, the output gap has significantly narrowed, indicating a buildup of demand pressures," according to the statement.

Based on these developments, the Monetary Policy Committee is of the view that in order to preempt overheating of the economy and inflation breaching its target rate, this is the right time to make a policy decision that would balance growth and stability in the medium- to long-term, Tariq Bajwa, added.