UPDATE 1-Pakistan central bank lifts interest rates to 7.25%

(Adds quotes, forward guidance)

KARACHI, Sept 20 (Reuters) - Pakistan’s central bank raised its benchmark interest rate by 25 basis points to 7.25% on Monday, the first move it has made since slashing borrowing costs last year.

The bank also signalled that it could raise rates further in coming months as the need to support the country’s economy due to the COVID-19 crisis has eased, but it said any future moves would depend on emerging economic data.

“Since its last meeting in July, the MPC (Monetary Policy Committee) noted that the pace of the economic recovery has exceeded expectations,” the State Bank of Pakistan said in a statement accompanying the decision, noting the country’s COVID situation was improving and domestic demand strengthening.

“The MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time,” the bank added.

The central bank had slashed rates by 625 basis points in June 2020 as it sought to deal with the economic fallout of the COVID-19 pandemic, which it said in its latest statement was gradually coming under control.

“As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit,” the bank said.

It noted that although inflation had eased somewhat in recent months it remained high at 8.4% in July and August and inflation expectations and wage growth had increased, which could put future upward pressure on prices.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately,” the bank said.

Pakistan’s rupee has also been under pressure in recent weeks, falling to a record low this month against the U.S. dollar in a depreciation that some currency dealers blamed on an outflow of dollars to neighbouring Afghanistan, where the banking system has been in disarray since U.S. and allied troops withdrew and the Taliban took over. (Reporting by Syed Raza Hassan and Charlotte Greenfield; Editing by Catherine Evans and Hugh Lawson)