Still unchanged

Ask the business community in the country to make just one wish, and they will be unanimous that the central bank should cut down its policy rate so that cheaper working capital could spur the economic activity and start lifting the GDP growth rate. Unfortunately, that has not been the case for as many as 10 months. With the real interest rate – the difference between the current interest rate and the inflation rate – turning positive a month back on a spot basis after a gap of 37 months, there was a high likelihood that the SBP will make a first cut in 10 months in its benchmark policy rate this time. However, as against the expectations, the central bank has left its key policy rate unchanged at a record high of 22% for the seventh consecutive time.

According to the SBP’s Monetary Policy Committee, the continuation of the current monetary policy stance, with significant positive real interest rate, was necessary to bring inflation down to the target range of 5-7% by September 2025. With the economic activity picking up slowly and gradually and external account situation also improving, as mentioned by the MPC itself, the SBP’s approach could only be described as cautious. The central bank believes that a variety of factors may have implications for the near-term inflation outlook, and there is need to maintain the status quo on the interest rate. These factors include: potential technical correction in the global commodity prices that have bottomed out currently; volatility in the global oil prices; recent geopolitical events that have added uncertainty about their outlook; and the upcoming budgetary measures.

As of now, thus, it is only hoped that the current trends continue so that there are hopes for gradual easing in the policy rate the next time the MPC huddles for a monetary policy review.

Published in The Express Tribune, April 30^th, 2024.

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