KARACHI: The State Bank of Pakistan (SBP) has maintained a tight monetary policy for over two years, the second-longest period in recent history, keeping interest rates higher for longer than normal, data showed on Saturday.
The country awaits a monetary policy announcement on Monday, with opinions divided on whether the central bank will start monetary easing or maintain its benchmark interest rate at a record 22 percent.
“The SBP has traditionally adhered to a historical average of around 23 months for transitioning its monetary policy stance from tight to easing. However, the present situation deviates markedly from this pattern,” said brokerage Arif Habib Limited in a note.
“As of now, the SBP has sustained a tight policy stance for a consecutive period of 31 months (September 2021-todate).”
According to historical data, the longest time gap between a rate hike and a rate drop was 49 months, and it happened between 2005 and 2009.
“The current stretch of 31 months without a rate cut ranks as the second longest in recent history,” the brokerage said.
"The prolonged duration of elevated interest rates, without a corresponding cut, highlights the need for the SBP to reassess its stance in the upcoming monetary policy, given the evolving economic dynamics."
There are several reasons why the central bank may remain cautious and stick with its tight stance at Monday's meeting. Pakistan prepares for an International Monetary Fund's board approval and talks on a longer-term programme. After the policy decision on Monday, the IMF’s executive board will meet to discuss the approval of $1.1 billion in funding for Pakistan, which is the final installment of a $3 billion stand-by arrangement.
“Given that interest rates in the US are expected to remain unchanged. It's a tough call this time, perhaps a 50-50 case whether we will have rate cuts or not,” said Mustafa Mustansir, the head of research at Taurus Securities.
“Given the outlook for inflation at this point and the repercussions of tightening on the economy especially, GDP growth, it is about time the SBP started to cut interest rates. Even a token cut would be welcome,” Mustansir added.
“But on the flip side, there is a strong case that the SBP may continue with its cautious stance yet again as we approach negotiations for another IMF programme.”
The largest risk is a Fed pivot. Any expectations for a rate cut have been stretched until December due to the US's resurgent inflation. Dollar flows from riskier assets and emerging nations will now be redirected towards safer, higher-yielding assets.
The SBP's policymakers need to exercise caution, then. Furthermore, the increasing level of geopolitical risk worldwide has supported the rising prices of food, commodities, and oil. Increased costs will exhaust the nation's reserves and cause inflation to flare up again.
There are, nevertheless, additional arguments that might prompt the SBP to cut rates. Real interest rates have gone positive, indicating a possible preparedness for a change in monetary policy, and inflationary pressures are expected to abate. Due to creditor weariness, non-performing loans at banks are increasing. The private business sector will be revitalised by some guidance on falling interest rates.