THE State Bank of Pakistan’s decision to keep its benchmark rate unchanged at 15pc seems to be based on projections that appear more optimistic than prudent. It is hoped that time will prove these fears wrong. In its latest monetary policy statement, the central bank has said that “the continued deceleration in economic activity as well as the decline in headline inflation and the current account deficit” have motivated it to leave the policy rate unchanged. The caveat is that this assessment is based on “currently available information” about the impact of floods. Ceteris paribus, the central bank says the current rate “strikes an appropriate balance between managing inflation and maintaining growth”. The SBP Monetary Policy Committee was clearly conflicted while making its decision. The statement expresses fear of higher and more persistent inflation due to food supply shocks caused by the floods but attempts to balance it, citing a slowdown in growth, which will reduce demand-side pressures and dampen underlying inflation. Though it celebrates a moderation in overall economic activity thanks to fiscal tightening, it also concedes that core inflation continues to rise and the recent fall in headline inflation has more to do with an “administrative” cut in electricity prices rather than a modulation in demand. This theme — positives being offset by negatives — dominates the statement, suggesting that the central bank may have just thought it better put off the decision till its next review.

While the unchanged policy rate appears to have been the market’s consensus expectation, some had urged the central bank to continue tightening. There is good reason for demanding so. The fundamentals of the economy haven’t improved by much. The biggest risk factor at the moment, it appears, is the uncertainty over how much damage the floods have done and how much further damage still has to hit in the weeks and months to come — something the SBP concedes it does not have a handle on. With inflation still burning hot, it would have been better if the State Bank consolidated further, yet it appears to have placed too much faith in the “orderly movements in the rupee” to contain core inflation. It is hoped that the State Bank is not making the same mistake it made before the start of the fiscal tightening cycle when it resisted taking a proactive stance and was forced to take remedial measures later.

Published in Dawn, October 12th, 2022