THE State Bank does not seem willing to leave anything to chance. On Thursday, it jacked up the policy rate by an aggressive 125 basis points in response to the shocking inflation print for June and a trade deficit that rapidly went off the rails in the last two months of the recently concluded fiscal year. The rate hike followed an earlier 150bps jump announced in May, which though intended to moderate demand, seems not to have had the desired effect. The benchmark rate now stands at 15pc — the highest it has been since November 2008. The acting State Bank Governor, Dr Murtaza Syed, made it clear at a press conference that the central bank is quite concerned about inflation, which made a 14-year high to touch 21.32pc in June. He warned that inflation would remain between 18pc to 20pc for the year, but the State Bank will try to ensure that it does not rise any further on a month-on-month basis even if the year-on-year numbers remain elevated. The governor said he expects the economy to grow between 3pc and 4pc this year, which he termed a healthy level which will keep inflation in check. He also urged the government to protect the poor through targeted subsidies, while asking the privileged to pick up the tab for a change.

The State Bank has chosen the aggressive route to bring inflation within range, but it remains to be seen whether it can achieve the soft landing that it is aiming for. The State Bank chief was quite frank in admitting that central bank chiefs all over the world are worried about current inflation trends and seem unsure of how to tackle the situation. Both local and international observers have recently expressed fears that economies might be pushed into a recession by central banks’ zeal to control inflation through tighter interest rates. The Pakistani government must make necessary macroeconomic adjustments so that the pressure does not remain on the State Bank to control inflation through monetary tightening alone. For example, inflation has been considerably augmented by food prices, which were up 26pc year-on-year last month. As the State Bank governor pointed out, the central bank cannot rein in food inflation: it is up to the government to boost agricultural productivity and make sure any problems in the agri supply chain that can disrupt markets are resolved in a timely manner.

Published in Dawn, July 8th, 2022