Unchanged policy rate

The State Bank’s decision to hold the policy rate at 22% came as a surprise to several analysts, as inflation had been steadily declining since the start of the calendar year. However, one school of thought noted that the decision to leave the interest rate unchanged has come at the start of Ramazan, when the prices of several food products usually shoot up. Indeed, the declining trend broke last week, the annual rate went up past 30% again, settling at just under 33%. The central bank likely did not want to take an action that could further exacerbate the historical trend. Meanwhile, the ongoing talks with IMF may also have an inflationary side effect, because investor confidence will increase if the talks go well.

Despite the high rate, economic activity has also been increasing, especially in the agriculture sector; and the current account is not looking too shabby either, despite a reduction in inflows. Given that the ‘Ramazan bump’ in inflation has been relatively low, it would not be a surprise to see a rate cut in the next monetary policy committee (MPC), as the committee would invariably gain some confidence to make some policy moves to encourage more economic activity.

Inflation began spiraling out of control a little over two years ago, and despite the steady decline from all-time record levels last year, we are still only back to 2022 levels. This puts the State Bank in a precarious position, as pressure builds for an interest rate cut, even though inflation remains at unsustainable levels. At the same time, keeping the interest rate at the current level means most economic sectors will remain starved of cash, which in turn will make them less competitive and leave them at a disadvantage in the world economy. Many Pakistani industrial sectors already have a lot of catching up to do to compete globally, and continuing to starve them of investment may lead to a point from where growth leading to competitiveness becomes impossible.

Published in The Express Tribune, March 20^th, 2024.

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