Unchanged policy rate

SBP admits that inflation will be higher than it had previously projected, raising its annual estimate to almost 25%

The State Bank’s decision to keep the interest rate at 22% despite a steady decline in inflation rate was not completely surprising, since it will allow the elected government the opportunity to discuss future strategies with the bank instead of forcing it to potentially inherit a new inflation spike driven by lower rates. The bank also admitted that inflation will be higher than it had previously projected, raising its annual estimate to almost 25%. Many experts have said for several months that the policy rate needs to be brought down to encourage an economic turnaround, while defenders of the high rate note that record-high inflation would be even higher if the rate was cut, likely eating into the positives that come with higher economic growth.

But while a high rate has clearly stunted economic growth, and inflation has remained unsustainably high, almost six months of high rate have not been without achievements, and State Bank Governor Jameel Ahmad was keen to point this out, noting that a significant rise in foreign exchange reserves has taken the country from the brink of bankruptcy to a slightly less dangerous cliff. That rise has been influenced, among other things, by lower import demand due to economic stagnation. But the country has also been able to pay off a large amount of foreign debt —over $6 billion — while doubling reserves to over $8 billion.

The current account deficit — which actually turned into a surplus for a little while last year at the peak of import restrictions — has also defied expectations to remain quite low. The SBP chief believes this will continue and help create wiggle room for upcoming debt repayments. And even if the State Bank’s 3% economic growth projection remains optimistic, at least the incoming government will have the leeway to chart a path to growth, rather than scrambling to avoid bankruptcy on day one. In this sense, it may not have been pretty, but the rate hike has fixed some major problems, at least in the short term.

Published in The Express Tribune, January 31^st, 2024.

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