Another rate cut

The economy seems to be gradually opening up as the State Bank takes a decisive yet cautious step by cutting the key policy rate by 200 bps, bringing it down to 13%. Effective from December 17, this move comes about as the central bank's attempts to balance the dual objectives of stimulating growth and controlling inflation.

The SBP's Monetary Policy Committee attributed this rate cut to a steady decline in food inflation and the phasing out of the gas tariff hike introduced last year. November's headline inflation dropped to 4.9%, creating substantial room for easing. However, the central bank refrained from aggressive cuts, opting for a measured approach. This restraint acknowledges core inflation's stubbornness at 9.7% and the volatility in inflation expectations, which continue to cast a shadow over economic stability. The impact of this policy shift can be gauged from the fact that the stock market index surged over 1,700 points even in anticipation of a rate cut. Investor confidence appears to be returning, and early signs of improved economic activity further reinforce the belief that Pakistan may be on the path to recovery. Businesses, however, had been vocal in their demand for a sharper reduction of 400 to 500 bps, arguing that the "still-high" cost of borrowing remains a significant impediment to growth. The SBP's decision to limit the cut to 200 bps aligns more closely with the forecasts of financial experts, who warned against drastic monetary easing. A steep reduction to single-digit interest rates could destabilise the banking sector and reignite inflation – risks the central bank seems determined to avoid.

Analysts predict that inflation may decline further, possibly reaching as low as 3.5% in December, potentially creating room for additional rate cuts. However, the central bank is expected to remain vigilant. The current policy rate of 13%, while easing some pressures, is still not sufficient on its own to address the deeper structural issues that have historically plagued Pakistan's economy.