Stagnant rate

After six consecutive rate cuts, the SBP has finally decided to hit the brakes. At its meeting on Monday, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 12 per cent, amidst demands from business leaders to cut rates by around 500 basis points (bps). The MPC noted that while inflation during February was lower than expected, it assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation. Core inflation is also proving to be harder to tame than expected and remains at an elevated level, with the potential for an uptick in food and energy prices to trigger an increase in inflation. Consumer and business expectations of inflation also remain mixed. Aside from the inflation picture, some pressures on the external account have also emerged, with imports rising and weak financial inflows. The current account turned into a deficit of $0.4 billion in January 2025 after remaining in surplus over the past few months and, coupled with weak financial inflows and ongoing debt repayments, this has led to a decline in the SBP’s foreign exchange reserves. The MPC also highlighted how the global uncertainty created by the ongoing tariff escalations has prompted central banks in both advanced and emerging economies to slow their rate of monetary easing. The country also fell further behind IMF revenue collection targets in January. Given these developments, the MPC assessed the current real interest rate to be adequately positive on a forward-looking basis to sustain macroeconomic stability.

While all this may not paint a bright picture of the economy, it is important to remember that the policy rate has not yet begun to rise and is 1000 bps lower than in June 2024, when the MPC started its rate-cutting cycle. The MPC noted that the impact of the sizable earlier reduction in policy rate is now materialising, with high-frequency indicators, such as sales of automobiles, POL products and cement, import volumes, credit to the private sector, and the purchasing managers' index, showing that economic activity is gaining further traction. That being said, the business leaders calling for more aggressive rate cuts do have a point. The cost and ease of doing business in the country and the access to finance are far lower than they are in Pakistan’s export competitors. This is due in part to the policy rate, which is still on the high side despite months of rate cuts. And while these cuts might have produced somewhat of an uptick in economic activity, the country’s growth forecast remains at a depressed 3.0 per cent, as per the IMF. This is almost recessionary territory for an emerging economy with a rapidly growing population. Even the MPC admits that the momentum depicted in the high-frequency indicators is yet to fully reflect in large-scale manufacturing (LSM) data, which contracted by 1.9 per cent in the first half of the current fiscal year.

The growth struggles, however, do not necessarily invalidate the MPC’s cautious approach. The observations it made about core inflation, pressures on the external account and global uncertainty still stand. As such, Pakistan appears to be caught in the trap of struggling to afford its own growth. This has arguably been the economy’s Achilles heel for the past two to three decades. The country’s import-led growth model fails to stimulate local industry or even attract needed foreign investment. Without anything to tame the growth, balance of payment problems inevitably emerge. Until the country's policymakers find a workaround to this problem, growth will continue to suffer.