The State Bank of Pakistan has reduced the policy rate by 100 bps, bringing it to 19.5 per cent. This reduction comes in response to falling inflation in the country. Economic theory suggests that demand-pull inflation can be controlled by increasing interest rates. However, in Pakistan's case, inflation is not due to high demand. In fact, aggregate demand has contracted over the past few years. The inflation in Pakistan is primarily driven by international market inflation, high energy prices, and supply shortages of essential commodities.
At 19.5 per cent, Pakistan's policy rate is among the highest in the world. This high rate cannot reduce global petroleum prices, increase the supply of essential commodities, or lower electricity prices in the country. Instead, monetary authorities should consider significantly reducing the policy rate to encourage investment and production, thereby boosting employment and overall economic activity in the country.
Sabeel Khan Shinwari
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