A stable rate

In accordance with expectations, the State Bank of Pakistan has announced it will keep the policy rate stable for the next two months. The SBP was not expected to reduce the policy rate further due to the larger set of macroeconomic indicators. With inflation on the rise, a reduction of the policy rate would not have made sense. The consumer price index has gone up to 3.6 percent for August 2016, which is double the 1.8 percent increase for August 2015. Core inflation has also been higher than last year. If the trend continues, there may need to be a revision of the policy rate upwards despite businesses and some analysts pushing for reducing the state. Another major risk factor is global oil prices, which could go up after a long period of low prices. With the overall expectations of global growth low and the conflict in the Middle East not looking to subside soon, there could be unexpected effects on the Pakistani economy. The SBP itself noted the US Federal Reserve interest rate hike, slowdown in the Chinese economy and Brexit related uncertainty as concerns.

The SBP statement, however, paints a mixed picture of the future of the Pakistani economy. Pakistan’s current account deficit is expected to widen further, which suggests that the SBP does not believe Pakistani businesses will be able to improve exports. CPEC-related projects will boost the construction and power sectors but the rest of the economy may not have much of a recovery. Under the current circumstances, the SBP has chosen well to keep the policy rate stable. This is despite pressure from the KP finance minister who insisted that the policy rate be brought down to five percent to encourage investment. The trouble with this logic is that despite Pakistan already having historically low interest rates investment has not increased in the country. Low interest rates are not helping the industry. Decreasing interest rates further is unlikely to spur more investment so it makes more sense to keep interest rates in line with inflation. The SBP decision confirms there is a long way to go before Pakistan’s economy recovers.