Another rate cut

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The SBP has made another, 100bps cut in the interest rate, bringing it further down from the record levels of the past couple of years. While the rate is still relatively high at 11%, it is half of where it stood last June. The trend of reductions has been a response to the flattening of the inflation graph — the extremely high base rate means inflation has been almost stagnant this year, though most consumers have not been able to benefit much because their wages have been stagnant for several years.

However, the rate cut does represent the SBP's confidence that inflation is no longer a major concern and the priority should be to attempt to stimulate more economic activity, especially at a time when the US tariffs have upended economic projections for almost every country in the world.

Lowering interest rates can stimulate the economy by making borrowing more affordable, reducing financing costs and encouraging businesses to undertake new projects, expand operations and hire more employees. Pakistan's growth projections have been steadily sliding since President Trump took office and began enacting policies inspired by the ones that turned the global economic depression of the 1930s into the Great Depression.

Indeed, some experts believe the SBP will continue to steadily cut rate for a while longer because offsetting the economic losses caused by Trump's tariffs will require making local financial markets as investor-friendly as possible.

However, as we noted, while the policy rate cut may foster economic growth, it must be balanced against the risk of not triggering inflationary pressures. Core inflation should stabilise at under 8%, but could rise rapidly if demand surges unexpectedly. The central bank must monitor this closely, ensuring that any increases in inflation remain within the target range 5% to 7%.

While the signs are good, stakeholders must remain vigilant because there are too many balls in the air for everything to land properly. A slow response to any of Trump's international pronouncements could throw the global economy into a spin.