Pakistani Rupee Stabilizes as Central Bank Hikes Rates to 17.25%

The Pakistani rupee (PKR) stabilized on Friday after the State Bank of Pakistan (SBP) announced a surprise 50 basis point interest rate hike, raising the benchmark policy rate to 17.25%. The move, aimed at countering persistent inflationary pressures and stabilizing the currency, helped the rupee recover slightly to trade at PKR 277.80 against the U.S. dollar.

The rate hike comes amid mounting fiscal challenges and external debt obligations that have put significant strain on the country’s foreign exchange reserves. Inflation in Pakistan remains elevated at 17.8%, fueled by rising food and energy prices, a depreciating currency, and delays in receiving external financing. The SBP noted in its statement that the decision was made to “anchor inflation expectations” and “preserve macroeconomic stability.”

The rupee has lost over 9% against the dollar year-to-date, sparking concern among importers and investors. Friday’s hike is the first tightening move in three months and signals a shift in tone from the central bank, which had previously paused rate increases in an attempt to support growth. Analysts say the SBP is now prioritizing inflation control and exchange rate management amid fears of further devaluation.

The IMF has also been closely watching Pakistan’s monetary policy as part of its ongoing review under the Extended Fund Facility (EFF). Some economists believe that Friday’s hike will help unlock the next tranche of IMF funding, which could boost market confidence and ease pressure on the rupee in the short term.

Meanwhile, foreign exchange traders noted a slight improvement in sentiment following the announcement. Trading volumes in the interbank market remained thin, but the rupee’s recovery from intraweek lows below 280 was welcomed by businesses and investors alike. The open market rate also narrowed slightly, indicating improved liquidity conditions.

The SBP also hinted at further policy tightening if inflation does not ease in the coming months. It emphasized the need for coordinated fiscal and monetary measures to address the country’s widening fiscal deficit, which currently stands at over 7% of GDP. Structural reforms, tax collection, and energy pricing remain key concerns for international lenders and credit rating agencies.

The bond market responded positively, with yields on short-term treasury bills rising nearly 75 basis points, attracting renewed investor interest in rupee-denominated assets. However, equity markets closed slightly lower, with the KSE-100 index down 0.6% on concerns over borrowing costs and slower economic growth.

While challenges remain, the SBP’s proactive stance may provide short-term relief to the currency and restore some degree of investor confidence in Pakistan’s economic management.