Interest rate gamble

The central bank has taken a calculated risk. By deciding to retain the interest rate at 15%, it has projected an equation that could go either way. While the SBP is supposed to address monetary corrections by tapping the interest rate as and when required, this time it has taken a call in dire straits. It expects that inflation and consumption statistics are likely to remain the same for the upcoming quarter, and the interest rate retention will help post a better picture down the line. In other words, the intention is to stem inflationary trends, and auto-control growth by addressing the menace of the current account deficit.

The million-dollar question is what impact it will have on a battered rupee. This uncertainty will take a toll, and the SBP must watch it out. If the present interest rate decorum and viability of commercial banks as well as liquidity manage to stir a sustainable order, then this roulette is worth appreciating. Till then, it is a fingers-crossed situation. Likewise, the upcoming meeting of the IMF Board which is set to approve the staff-level agreement and dole out $1.27 billion this week will keep the ball rolling.

The SBP has listed out an interesting observation as it said sticking to the 15% rate was also in line with recent actions by other central banks. This is based on the notion that the global economy is coming out of an unannounced recession, and commodity prices are slumping. Whether this will impact oil production and its retail is anybody’s guess, and this is where Pakistan’s problem rests as its production capacity confronts rising energy prices.

The SBP goes on to state a wish list too. The decision, it says, will contain external pressures and support the rupee going forward. In the same breath, it says it is an important tool to contain the current account deficit. Thus, if it is correct, both inflation and deficit margins must see a downslide. The dismal state of affairs earnestly needs a stringent monetary policy, with the priority to clamp down on inflation. There is no need to play good inflation, bad inflation.

Published in The Express Tribune, August 24^th, 2022.

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