KARACHI: The State Bank of Pakistan (SBP) is scheduled to meet today (March 8) to review developments on the economic front and announce its monetary policy for the next seven weeks.
Mixed movements in economic indicators suggest that the worst is not yet over, but the market has built a consensus that the policy rate will remain at 15 percent for the next month and a half.
However, a significant portion of market participants did not rule out a cut of 25-50 basis points, seeing the inflation rate fall to 23.2 percent in September from a 47-year high of 27.3 percent in the previous month.
More importantly, new finance minister Ishaq Dar, who is sticking to his old prescription of running a controlled economy, would prefer to see an easier monetary policy.
Today’s Monetary Policy Committee (MPC) meeting is the first since SBP Governor Jameel Ahmed and Dar took office.
Interest rates and a flexible rupee-dollar parity are the two major tools available to central banks around the world to control inflation readings and steer economic momentum in their respective countries.
The State Bank has raised rates by a total of 800 basis points to 15% over 11 months (September 2021 to July 2022). The central bank kept the rate unchanged at its previous monetary policy in August 2022.
Further escalation is apparently not an option in the minds of policymakers, which could prove disastrous. The economy has already shrunk beyond desirable levels as a result of the devastating floods.
Rising international oil prices, which returned to $100 per barrel this weekend, pose a serious threat to Pakistan’s economy. They can keep the country’s import bill and inflation high. After OPEC+ announced a significant cut in oil production of 2 million barrels per day, the rise in oil prices seems to be lasting.
Developments in the energy market could force the central bank to leave its benchmark interest rate unchanged. On the other hand, lower inflation, narrowing of the twin trade and current account deficits and a smart recovery policy of the rupee against the US dollar could lead to a rate cut.
