Token rate cut

The State Bank of Pakistan has defied market expectations and international lenders by cutting its key policy rate by 50 basis points to 10.5%. The decision follows four consecutive holds dating back to May and signals a major shift in priorities from inflation containment towards stimulating growth. While some analysts were bullish on the move and saw it as having the potential to bolster industrial output and exports, others are worried that it will further harm the poor, who are still struggling to come to terms with inflation. This is because, despite the overall rate of price increases declining this year, inflation was so high over the last couple of years that most people's pockets are still catching up.

The central bank itself justified its action by pointing to headline inflation, which has remained within the government's 5-7% target range for several months, and the increase in foreign exchange reserves, while admitting that there is "limited space" to support the economy. Interestingly, the limited space argument may cause the move to backfire, as some industry groups say the cut is a "token adjustment" that is far too small to benefit industrial units that are competing with regional rivals in countries with significantly lower borrowing costs due to lower rates. Meanwhile, the struggling citizens who will have to pay more for groceries are not going to be impressed by how much the economy is benefiting when their belts are getting even tighter.

It is also worth noting that the joy in government circles over the rate cut lends credence to the concern that it was politically driven rather than economically prudent. With that in mind, if growth turns out to be an illusion and there is instead a spike in inflation or deterioration of external accounts, the rate cut will rightly be seen as a premature misstep that sacrificed hard-won stability.