State Bank of Pakistan has increased the key interest rate by 150 basis points to 12.25 percent.
In a statement issued after the meeting of Monetary Policy Committee in Karachi today, the central bank said the new rate will be in effect from Tuesday.
It said that economic growth is expected to slow in current financial year but rise modestly in the next.
This slowdown is mostly due to lower growth in agriculture and industry.
Some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported program, a rebound in the agriculture sector and government incentives for export oriented industries.
The statement noted that current account deficit narrowed to 9.6 billion dollars in Jul-Mar FY19 as compared to a deficit of 13.6 billion dollars during the same period last year, a fall of 29 percent.
The reduction is mainly driven by import compression and a healthy growth in workers' remittances.
The State Bank said the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors.
The Central Bank will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market.
The bank said that the overall fiscal deficit is likely to be considerably higher during Jul-Mar FY19 as compared to the same period last year due to a shortfall in revenue collection, higher than budgeted interest payments and security related expenditures.
The Central Bank said average headline CPI inflation is expected to be in the range of 6.5-7.5 percent this financial year and it is anticipated to be considerably higher in the next financial year.