Unchanged policy rate

The State Bank’s decision to keep the interest rate at 22% indicates the central bank’s lack of confidence in policymakers to reign in inflation. The more exact explanation is that growth in the new fiscal year is expected to be moderate, at best, and that the bank has to account for the terms of the IMF’s stand-by agreement and other recent monetary policy changes.

However, even though the State Bank says inflation peaked at 38% in June, reports suggest the IMF wanted to see another rate hike — between 50 and 100 basis points — to help bring down inflation faster. It is also noteworthy that the last rate change — a 100 point hike in June — was agreed to at an unscheduled Monetary Policy Committee meeting just ahead of the IMF’s greenlight for the stand-by agreement. Although it was blamed on a “slightly deteriorated inflation outlook” at the time, it is becoming increasingly likely that the move was meant to appease the IMF. In fact, the government expects inflation to hover between 20% and 22% this year, indicating that the current policy rate is actually higher than expected inflation, which is highly unusual since the interest rate is usually set lower than inflation when policymakers are aiming for growth.

However, the IMF’s inflation prediction is almost 26%, which makes more sense in the context of the interest rate and reports regarding its desire for another rate hike. But the rate itself is not the only overly rosy picture painted by the bank. While inflation has fallen, the rise and fall are both global phenomena caused mostly by food and energy price fluctuations after the Russian invasion of Ukraine. Pakistan’s inflation for the recently ended fiscal year was actually a crippling 29%, despite aggressive austerity measures. The fact that the rate remains high also does not bode well for the bank’s target of bringing inflation down as low as 5% by 2025. Such a contraction would take a dramatic decline, which can only happen if the government intervenes to control costs instead of hiking the prices of electricity and other utilities.

Published in The Express Tribune, August 2^nd, 2023.

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