Gibran Naiyyar and Asif Shahzad

ISLAMABAD (Reuters). During an emergency meeting, Pakistan’s central banking raised its policy interest rate by 250 basis point to 12.25%. It did so in a statement. The largest hike since years.

State Bank of Pakistan (SBP), cited a decrease in the outlook of inflation and an increase risk to external stability. These risks were increased by the Russia/Ukraine conflict as well domestic political uncertainty.

Although the next meeting of the monetary policy committee (MPC), was scheduled for April 25, the hike was not planned. However, the bank warned last month it might meet sooner than anticipated to protect price and external stability.

SBP stated in a Thursday statement that “since the last MPC Meeting, the outlook on inflation has deteriorated” and that there are increased risks to stability.

The statement said that futures markets suggested that oil and other commodities prices would continue to rise for a longer time, while the U.S. Federal Reserve was likely to raise interest rates faster than originally anticipated.

According to the bank, domestically the March Inflation Turnout was higher that expected. Political uncertainty had also increased, following a showdown between Prime Minister Imran Khan, and opposition.

“Heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting,” the bank said.

This also indicated that the central bank was under pressure due to a sharp fall in foreign currencies reserves. On April 1, the reserve balances of the central bank fell $728 million, to $11.3 Billion. This is a significant drop from $16.2 billion recorded on March 4.

According to the bank, the decrease was mainly due to government payments and debt repayments related to settlement of arbitration awards relating to mining projects.

Some of the decline is expected to be reversed as creditors renew loans, the bank said, assuring that Pakistan’s external financing needs in FY22 are fully met from identified sources.

According to the report, average inflation projections were slightly higher than 11 percent for FY22.

SBP continues to take further steps to lower inflation pressure and current account. This includes increasing refinancing rates.

Muhammad Sohail, Topline Securities said that “this step of SBP” was necessary because the market yields on T-bills weren’t in line with policy rates. This created an unusual situation.

Pakistani authorities raised $645 billion Pakistani rupees (3.43 Billion USD) during a Wednesday treasury auction. The 12-month yield was 13.3%.

($1 = 188.0000 Pakistani rupees)