THE State Bank’s latest monetary policy decision, which maintains the status quo on interest rates, shows that the central bank is unlikely to reverse its present tight monetary policy stance anytime soon, and that it will continue to pursue a cautious approach for the foreseeable future. The decision is driven not just by near- to medium-term risks to the inflation outlook, but also the bank’s implicit concerns pertaining to fiscal imbalances and delays in realising planned external inflows. The policy decision notes inflation had started to come down in January, in line with its projections, but that, despite a significant deceleration last month, the “level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations”. This, in the bank’s view, “warrants a cautious approach and requires continuity of the current [tight] monetary stance to bring inflation down to the target range [revised upwards in the last policy statement] of 5-7pc by September 2025”. However, it also adds, “this assessment is contingent upon continued fiscal consolidation and timely realisation of planned external inflows”.

That the SBP did not emphasise, as it previously did, that “the real interest rate remained significantly positive on a 12-month forward-looking basis as inflation is expected to remain on a downward path” appears to be another indicator of the potential continuation of a tighter monetary policy, at least in the near term. With global oil prices depicting an upward trend, the promised investment flows from friendly countries slow to come, and further potential adjustments in the administered prices of fuel and electricity that may push prices up — thus continuing to pose risks to the inflation outlook, at least in the short to medium term — it is advisable for the central bank to resist the temptation to reverse its tight policy stance because of the recent albeit fragile economic stability. Any misstep here would cost the economy and the inflation-stricken people hugely.

Published in Dawn, March 20th, 2024