AS anticipated, the dramatic drop in May’s inflation figures to 11.8pc — the lowest in 30 months — has provided enough ammunition to critics of the State Bank’s tight monetary policy stance to more forcefully call for lowering the year-old policy rate of 22pc. They argue that real interest rates are now above 1,000 bps on a forward-looking basis and that SBP must start reversing its stance. They also contend that rate cuts would mitigate the financial ‘stress’ on corporate borrowers and help slash our burgeoning domestic debt payments. However, this argument does not take into account the more compelling realities that favour the continuation of a tighter policy stance for now.

For starters, real rates stay negative on an annual basis as the average 11-month CPI inflation still remains as high as 24.52pc — down from 29.16pc a year ago though — despite a faster-than-anticipated drop in May’s inflation rates due to a high base effect, and falling food and fuel prices. Additionally, commercial banks’ non-performing loan portfolio, which is under 8pc — below its historic average — underlines that businesses are not feeling any unbearable stress on account of high inflation and record-high interest rates. Nor is there any evidence to show that the availability of cheaper money will drive up private investment in the current political-economic environment. Fears that a rate reduction will drive up imports leading to the evaporation of our meagre international reserves, thus putting pressure on the exchange rate, and increasing inflation also abound. Will the SBP bow to political pressure and cut rates, especially when inflation is projected to surpass the proposed target of 12pc for the next fiscal year because of economic stabilisation measures such as increases in the consumption tax, petroleum levy and power prices to meet the goals of the next IMF programme? We will know once the next monetary policy is announced on Monday.

Published in Dawn, June 5th, 2024