Policy rate pause

The State Bank has chosen to err on the side of caution and keep the policy rate unchanged at 11.5%, as it navigates its way through treacherous waters. Though still high, it is important to note that the rates are actually down by a cumulative 1,150 basis points since June 2024, so it is not as if the bank is afraid of aggressive monetary easing when merited. Also, with the Iran war now seemingly resolved, there is a good chance that the central bank will reassess a rate cut at their next meeting based on how the local and global economies recover from the fallout of the conflict.

After all, prior to the war breaking out in late February, Pakistan's economy was in the middle of a period of steady growth and declining inflation, leading to near-certainty among economic pundits that further rate cuts were coming. Unfortunately, economic turmoil brought about by the war erased most of the gains and left many people worse off than when the conflict started. Headline inflation has climbed back into double digits, driven by rising energy costs and higher wheat prices. The intense supply chain disruptions will also take several months to smooth over, meaning that inflation around the world will also remain high until the market situation normalises. The benefits of oil prices decreasing will also take a while to become visible at the pump, as the government remains wary of making knee-jerk, populist moves. This is also important because improved economic fundamentals have left us in a situation where, with a bit of luck, we can still right the ship if the pieces fall into place.

But this is no consolation for investors and the business community, who have long been complaining about the high cost of working capital, which undermines competitiveness and discourages investment. Even though the SBP's position is understandable, the high risk posed by volatile commodity prices, pending tariff adjustments, fiscal slippages and weather-related threats to food supplies all combine to create a situation from which smart investment is the only way out.