Pakistan’s central bank on Monday held its key rate at 22 per cent for the fifth policy meeting in a row due to elevated inflation levels, the governor of the State Bank of Pakistan (SBP) said.

The decision is the last under a caretaker government before general elections due next week and comes as Pakistan undertakes reforms linked to a $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF).

The bank said the decision was warranted due to “elevated” inflation, but that the rate in January was expected to ease from the previous month when it was 29.7 per cent.

It forecast that inflation would decline at a faster pace from March and full-year average inflation would be 23-25 per cent.

“State Bank of Pakistan opted for a wait and see approach during this policy (meeting) and refrained from abruptly starting a monetary easing cycle,” said Tahir Abbas, head of research at Arif Habib Limited.

“Economic indicators are gradually improving and inflation is expected to decline significantly from March 2024 onwards, where we believe that (the) SBP is expected to start a monetary easing cycle,” he said.

The country’s external accounts and foreign exchange reserves have also improved, the current account deficit is expected to shrink, and although inflation remains elevated, it would start declining faster from March, central bank Governor Jameel Ahmad said.

Pakistan’s key rate was raised to an all-time high of 22 per cent in June to fight persistent inflationary pressures and to meet one of the conditions set by the IMF for securing the bailout.

While the rescue programme has helped to avert a sovereign debt default, some of the attached conditions, such as raising its benchmark interest rate, increasing government revenue, and increasing electricity and natural gas prices, have complicated efforts to curb inflation and have dampened business sentiment.

Despite negative real rates, the business community had been pushing for a rate cut for some respite amidst economic challenges.

The International Monetary Fund’s (IMF) board has approved a roughly $700 million loan for Pakistan under a $3 billion bailout, the fund and the finance ministry said earlier.

The IMF’s completion of its first review of the programme and the board’s decision brings the total disbursements under the Standby Arrangement (SBA) to about $1.9 billion, the fund said.

“There are now tentative signs of activity picking-up and external pressures easing,” said in a statement Antoinette Sayeh, a deputy managing director at the fund.

“Continued strong ownership of the programme remains critical to ensure the current momentum continues and stabilisation of Pakistan’s economy becomes entrenched.” Pakistan is operating under a caretaker government and the IMF loan programme, approved in July, helped avert a sovereign debt default.

Ahead of the bailout, Pakistan had to undertake a slew of measures demanded by the IMF, including revising its budget, a hike in its benchmark interest rate, and increases in electricity and natural gas prices.

“Continuing with regularly-scheduled adjustments and pushing cost-side power sector reforms are vital to improving the sector’s viability and protecting fiscal sustainability,” Sayeh said.

An IMF mission led by Pakistan mission chief Nathan Porter concluded its visit in November. It reviewed whether Pakistan was on track to meet benchmarks set under the SBA agreed in July and signed a staff level agreement.

Under the bailout deal, the IMF also got Pakistan to raise $1.34 billion in new taxation to meet fiscal adjustments. The measures fuelled all-time high inflation of 38 per cent year-on-year in May, which is still hovering above 30 per cent.

The fund said that despite elevated inflation, “with appropriately tight policy” it could fall to 18.5 per cent by end-June. It added the exchange rate has been “broadly stable.” “IMF funding along with recent inflows from multilateral lenders will further help the Pakistani rupee, that is fairly stable (over the) last few months,” said Mohammad Sohail, CEO of Topline Securities.

He added that this new tranche would help Pakistan in getting rollovers from friendly countries like the United Arab Emirates, China and Saudi Arabia and ease external debt repayment pressure.

Pakistan’s international bonds, which had already clocked healthy gains earlier on Thursday, soared after the announcement. The 2036 issue enjoyed the biggest gains, jumping 3.5 cents to trade at 62.59 cents in the dollar, Tradeweb data showed.

Pakistan’s caretaker government, under interim Prime Minister Anwaar ul Haq Kakar, is meant to oversee a general election.

Caretaker governments are usually limited to overseeing elections, but Kakar’s set-up is the most empowered in Pakistan’s history thanks to recent legislation that allows it to make policy decisions on economic matters.

The legislation is aimed at keeping on track the conditions for the bailout secured in June.