THE State Bank has taken its own sweet time to spring into action to avert the growing risks to the economy, which had for weeks been threatening to erupt into a full-fledged economic crisis. After holding the rate steady at 9.75pc since January, the bank had to finally raise its key policy rate by a hefty 250bps to 12.25pc following an emergency meeting on Thursday. The increase renders the real interest rates mildly positive (the policy rate minus the expected inflation) and, as the bank asserted in its monetary policy statement, it will help preserve external and price stability. But the central bank’s inaction has already taken a big toll on both the nation’s currency and its fragile foreign exchange reserves. The decision was announced hours before the Supreme Court, in a landmark ruling, declared the cancellation of a no-confidence vote against the prime minister and the subsequent dissolution of the National Assembly to be unconstitutional. It is hard to say whether it was the rate hike or the verdict that had a more positive impact on the rupee and the stock market the next morning. But the two seem to have worked in tandem.

The State Bank has cited numerous internal and international trends, including domestic political uncertainty, as factors that had necessitated a “strong and proactive policy response”. While the bank’s response to growing threats to external and price stability may be considered strong, it is certainly not proactive. If anything, the belated increase in the rates validates criticism that the bank is mostly behind the curve when it comes to using interest rates to tackle economic challenges. For example, it kept the lending rates unchanged last month, but sounded a note of caution that it could raise credit prices ahead of the next scheduled meeting of the Monetary Policy Committee. Obviously, the ambiguous decision created uncertainty in the market. Many saw it as the bank’s reluctance to add to Prime Minister Imran Khan’s troubles, although global and domestic economic trends demanded an immediate rate increase. Those who believe the latest monetary policy decision has been forced upon the bank by the widening gap between the policy rate of 9.75pc, the T-bill rate of 13.25pc and Kibor of 13.19pc, aren’t altogether wrong. The ‘absolute autonomy’ granted to the State Bank was meant to free it from political influence. Clearly, it still remains subservient to the political authorities.

Published in Dawn, April 9th, 2022