The State Bank of Pakistan’s Monetary Policy Committee continued its policy of cutting its benchmark interest rate, with its biggest-ever cut, of 250 basis points, bringing the rate down to 15 percent. As it is, inflation in October at 7.2 percent was slightly higher than in September, when it was 6.9 percent. This indicated that the reduction in inflation, which has been coming down all year, may have bottomed out. However, the MPC must have seen that there were few signs of it ramping up again, so it gave in to the pressure of the business community, which called for a reduction between inflation and the benchmark so as to encourage growth. That would mean that the cut should spur growth, creating jobs which will also coincide with the political aims of the government. Textile exports have grown so far this financial year, indicating the growth potential in the sector, provided interest rates stay low.
One of the corollaries of the rate cut is that the cost of debt servicing will go down. As SBP Governor Jameel Ahmed said at a post-meeting session with analysts, the rate cut would mean a reduction of Rs 1.3 trillion in debt servicing costs in this fiscal year. It should be noted that the rate started out at 22 percent and has come down appreciably. The savings will help the government in the first review of the IMF’s latest package, and may help because of the failure of the FBR to meet its collection target, which has resulted in less flows to the provinces, and their failing to meet their targets for surpluses.
One of the threats to inflation is the price of oil. So far, it has favoured the government, with OPEC+ having refined from the supply cut that will drive up the price. Another important factor for the MPC has been the falling inflation worldwide, from Iran and Turkiye, to the USA. That means a greater disposable income in consumers’ pockets, which will mean greater sales of Pakistani textile imports. If that happens, the greater growth would men a further slowing of inflation, and led to further rate cuts. The MPC needs to bring down its benchmark rate to the point where it offers a more reasonable rate of real return. Bringing the rate in one swoop down to the 5-7 percent recommended by industry might not be possible, but if inflation stays under control, it might target to be achieved next year.
