’TIS the season of keeping your options open. While it is easy to appreciate the reasons that are preventing the prime minister’s allies from choosing a side in the no-confidence resolution against him, it is hard to comprehend the State Bank’s reluctance to take a firm monetary policy decision. The SBP kept its policy rate unchanged last Tuesday at 9.75pc against market expectations in a volatile global and domestic economic environment. It cautioned that it could raise the rate ahead of the next monetary policy committee meeting scheduled for April 19 to “safeguard external and price stability”. The confusing signal has had quite an unsettling impact on the market, with cut-off yields in the public debt auction the very next morning going up by between 96bps and 130bps for papers of different tenors. The decision to hold the rate is widely speculated to have been driven by the present challenges facing the government amid the opposition’s move to remove the prime minister rather than by economic considerations. It can only be hoped that this was not the case.

This is not the first time that the debt market has disregarded the central bank’s decision. In December, we saw the central bank raise the rate by 100bps, saying, “it felt that the end goal of a mildly positive real interest rate on a forward-looking basis was now close to being achieved”. Looking ahead, it expected the rate to remain unchanged in the near term. Still, the market did not respond to it, and the bank had to repeatedly provide liquidity to the market through unprecedented 63-day OMO injections to bring down the cut-off yields. There are multiple reasons for the market’s scepticism of the SBP decision. For starters, the Russia-Ukraine conflict has created uncertainty in international commodity markets and rattled the global financial situation. This could exacerbate Pakistan’s current account deficit and stoke higher inflation than is anticipated. Likewise, the market doesn’t seem to agree with the SBP reading of the Rs246bn energy price relief as “fiscal deficit neutral”. On top of that, the anticipated delay in the conclusion of the ongoing review of the IMF programme on the new tax amnesty and relief package and growing political instability in the country aren’t helping at all. Therefore, to avoid adding to the monetary policy uncertainty, the SBP should have either increased the rate to tackle global and domestic trends or kept from cautioning about a possible hike before the next meeting.

Published in Dawn, March 15th, 2022