ALIGNING its decision with the trend in developed economies, the State Bank has acted wisely by holding its key policy rate steady at 22pc. The bank rightly argues that the continuation of a tighter monetary policy stance, with positive real interest rates, is important to “bring inflation down to the target range of 5-7pc by September 2025”. The bank has held its ground in spite of mounting pressure from the business community to commence rate cuts in view of significant positive interest rates on the back of the slowing pace of inflation. This shows that it sees escalation in global oil and commodity prices (with the situation in the Middle East worsening), budgetary stabilisation measures, the expected resolution of circular debt in the energy sector amid negotiations for a new IMF programme, and monetary easing delays by advanced economies, as risks to the near-term inflation outlook.

Indeed, those calling for rate cuts make a compelling argument. Headline inflation has declined by about 10 percentage points in the last three months and is anticipated to remain in the range of 15-17pc for the next 12-month period. Thus, positive rates have created room for the start of monetary easing. The rupee and foreign exchange reserves are stable amid an improving current account balance. Besides, they point out, while the economy is showing signs of modest recovery from last year’s contraction of 0.2pc, growth remains subdued and is causing unemployment. Businesses are in a crisis due to record-high financial costs and are having problems servicing their loans. The banks have reported that bad loans rose to Rs62bn in 2023, the highest in 13 years, amid negative private credit growth. However, the counter-argument is more compelling. Current levels of inflation are still high despite expectations of further decline. More crucially, the economic ‘stability’ achieved in recent months is fragile as lower rates will revive demand, rapidly increasing imports, bringing the currency under pressure, and unanchoring inflation expectations. Last but not the least, the expected delay in US rate cuts means that the State Bank will have to remain vigilant about its impact on global economic trends. Therefore, rather than succumbing to temptation or pressure for monetary easing, the bank has acted prudently to keep real rates significantly positive until domestic and global inflationary risks completely subside.

Published in Dawn, April 30th, 2024