Pakistan's central bank is set to raise interest rates as early as this week in an off-cycle review, investors said, as the South Asian nation faces pressure to mend its finances amid a $1 billion loan it is seeking from the International Monetary Fund.

Market participants in a recent treasury bill auction are expecting at least a 200 basis points increase in the central bank's policy rate, which stands at 17%. The expected increase is based on the rates the Pakistan government set in the auction to raise the funds.

The government raised 258 billion rupees ($991.54 million) in the auction on Wednesday. The cut off rates for the three-month, six-month, and 12-month tenors jumped 195 bps, 206 bps, and 184 bps higher than the previous auction.

The cash-strapped country is undertaking key measures to secure the IMF funding, including raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. While the government expects a deal with IMF soon, media reports say that the agency expects the policy rate to be increased.

The next meeting of the central bank's monetary policy committee is scheduled for March 16. Off-cycle rate reviews are not uncommon in Pakistan, though.

Adnan Sheikh, Assistant Vice President of Research at Pak Kuwait Investment Company, said that a rate hike is imminent, and it could be as soon as Friday.

“The next policy meeting is too far. Given the circumstances, it’s already being priced in,” Sheikh said.

The State Bank of Pakistan (SBP) and the IMF did not immediately respond to requests for comment.

Fahad Rauf, Head of Research at Ismail Iqbal Securities, said that the IMF has given a target to at least keep rates higher than core inflation. “Pakistan has two core inflation readings i.e., Urban (15.4% for Jan-23) and Rural (19.4%) and no national core number is released. If the SBP tries to bring rates above rural core inflation, it requires a rate hike of 200-300 bps,” he said.

Mohammad Ayub Khuhro, a fund manager at a local fund, said that recent economic data on government finances suggest that it was running low on its cash balances held with the central bank.

“This is why the government went ahead with picking up their desired targets despite a signaling effect it would send to the markets,” Khuhro said.

“The government has effectively bypassed the central bank in order to fulfill IMF conditions by accepting a higher cut off,” he added. ($1 = 260.2000 Pakistani rupees) (Reporting by Ariba Shahid in Karachi; Editing by Muralikumar Anantharaman)