THE State Bank’s decision to hold the policy rate at 11.5pc is the right one. With seven of the 10 members voting for the status quo, the Monetary Policy Committee has, with reason, resisted the wider business pressure — and temptation — to revert to monetary policy easing in an uncertain global economic environment exacerbated by the war in the Middle East. The case for a pause is even stronger today than it was a few months ago despite external sector stability and improved macroeconomic fundamentals. These are encouraging developments for an economy that has repeatedly been constrained by its external account. But the improvement should not be mistaken for the end of the crisis. The regional situation that appeared to be moving towards resolution a few weeks ago now looks uncertain. Oil supplies remain vulnerable to disruptions while uncertainty over shipping, energy routes and regional security continues. For an import-dependent economy such as Pakistan, a renewed oil shock could quickly widen the import bill, push inflation higher and put pressure on the rupee.
The latest inflation numbers underline that risk. Headline inflation accelerated sharply to 11.1pc in August from 9.2pc in July, showing how quickly supply-side pressures can return. The SBP acknowledges that inflation risks have risen significantly. This makes monetary policy particularly difficult. Cutting rates now would hardly provide any support to investment and domestic demand. Rather, it would risk adding to external and inflationary pressures if the regional shock intensifies. How inflation and interest rates move in the coming months will largely be determined by energy prices and the duration of the regional disruption. A premature rate cut is not necessary to achieve the modest growth recovery of 3.5-4.5pc, particularly when monetary conditions have already eased substantially from their previous punishing levels. For now, therefore, the continuation of the pause is desirable. The economy has gained some breathing space, but the external environment remains too uncertain for a rate cut. The central bank should preserve its room to respond if the regional crisis produces another oil or balance-of-payment shock. Instead of demanding lower rates at this moment, the business community should be calling for real reforms: the ones required to broaden the tax net, fix the energy sector, ensure policy predictability and improve export competitiveness.
