Interest rate status quo

The SBP decision to keep its interest rate at a record high of 22% hardens the belief of many experts that inflation is not coming down anytime soon. The bank’s Monetary Policy Committee (MPC) accepted that maintaining the high rate for the past six months was to keep demand in check. Unfortunately, pushing down demand invariably reduces growth, meaning that more dismal economic stats await us in the coming months. A concerning implication of the high rate is that the SBP did not feel confident about lowering the rate ahead of winter, even though oil prices have been steadily declining and domestic agriculture output has been up.

The SBP has been targeting inflation rates of 5% to 7% by the end of FY25, or a rate reduction of over 22% over the next 18 months. The SBP seriously needs to consider updating those estimates or giving a more detailed explanation of how that huge drop will come about. It is worth noting that the inflation target is “contingent upon continued targeted fiscal consolidation” and there are no more hiccups in dealings with the IMF and other international partners. That is a lot of variables, meaning the target is a best-case scenario rather than a prudent calculation, and yet another cause for potential investors to remain cautious.

And it is not just private investors who are concerned. The SBP’s extreme caution is also doing little to change the minds of bilateral lenders and investors, with the World Bank’s regional vice president recently noting that Pakistan’s economy is stuck in a low-growth trap with poor human development outcomes and increasing poverty — which is a technical way to say everything is broken. While the PDM government, the caretaker setup and the SBP have taken some steps to address these concerns at policy level, there has been a lack of coordination between the bank and the governments, which has led some to feel both sides are undercutting the other’s reforms, making them even more painful for citizens. The road is long, and the least all parties can do is make the ride less painful.

Published in The Express Tribune, December 14^th, 2023.

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