IT appears too big a temptation to ignore. The wider expectations for a steeper reduction in the borrowing costs sparked by a dramatic fall in the November CPI inflation to 4.9pc, the lowest since May 2018, will likely bring about greater pressure on the State Bank when it meets to review its monetary policy stance on Dec 16. The rapid slide in the annual CPI has widened the delta between the inflation reading and the State Bank’s policy interest rate to 10.1pc. Seen against the five-month (July-November) average of 7.88pc, down from 28.62pc during the same period last year, the delta still remains significantly high at 7.22pc. Undoubtedly, the rapid drop in inflation rate has created ample room for a further rate cut by the SBP, which already slashed borrowing costs by 700bps from 22pc to 15pc in its last four reviews since June.

Some business lobbies such as the FPCCI are calling for a reduction of 500bps to bridge the gap between headline inflation and real interest rates to push new investments and economic growth. But is our economy ready for that? Obviously not. Core inflation remains a bit sticky. Besides, the chances of the government introducing additional inflationary taxes to fill the growing gap of Rs356bn in FBR collection for the July-November period cannot be ruled out. Further, real money growth has exceeded the 25-year average, spawning fears of it translating into inflation. Then, there is always the risk of plunging global commodity and oil prices taking a U-turn amid geopolitical tensions in the Middle East and US president-elect Donald Trump’s threats of additional across-the-board tariffs on all imports, thereby boosting the dollar next year. The possibility of an increase in domestic electricity and gas prices to meet IMF goals also presents a real risk to inflation outlook. Hence, it is advisable for the SBP to continue to act prudently, and look past the temptation for longer-term price stability.

Published in Dawn, December 4th, 2024