Has State Bank (SBP) made a mistake yet again? That’s the question being asked by many as the bank last week decided to keep its benchmark policy rate steady at 15 percent for the second consecutive meeting to combat an unprecedented liquidity crunch worsened by the recent deadly floods. To help a struggling economy.The reasons are clear: the central bank’s recent track record during the pre- and post-Covid periods does not inspire much confidence when it comes to cutting or raising borrowing costs to boost or contain growth. On both occasions, the bank seems to have gone ahead of events that others had warned about long ago.
After resisting calls to actively reduce borrowing costs, the rate cut from 13.25pc to 7pc to combat the potential impact of the pandemic on the economy was slow to start a round of monetary easing as the global economy took a hit. The effects of the pandemic were already taking shape. clearSimilarly, the SBI ignored calls for fiscal tightening last year, even as it became clear that the previous government’s push for faster growth was meant to please voters ahead of the 2023 elections. The external sector was proving to be a source of pressure, as evidenced by the expanding current account. ImbalanceThe central bank’s recent track record during the pre- and post-Covid periods does not inspire much confidenceIt launched the rate hike after it became impossible for the government to avoid the International Monetary Fund (IMF) and restore its bailout package in January after weeks of negotiations and tough conditions. There are therefore valid reasons for concerns that the central bank should have further stabilized rates in the face of rapid and persistent inflation instead of holding it steady.The SBP, in its monetary policy statement, claimed that the decision “strikes an appropriate balance between managing inflation and maintaining post-flood economic growth.” The bank cut its growth forecast to around 2 percent from the pre-flood range of 3-4 percent and said headline inflation was higher than its forecast range of 18-20 percent. Will last longer than expected.
