Interest rates were pushed by the State Bank of Pakistan to a punitive 22 percent by last July to tame inflation, which peaked at 37.97 percent in last May, easing to 28.3 percent by this January. The February figure has come in at 23.1 percent, as measured by the year on year increase in the Consumer Price Index. There was already some market anticipation of a rate cut, and the SBP has given these rumours a time frame by announcing that its Monetary Policy Committee, which determines the discount rate determining all other rates, would meet on March 18, April 29 and June 10, the latter two meetings being times for before and after the Budget, thus covering the rest of the fiscal year.
The Shehbaz government is the beneficiary of this slowdown in inflation, though it cannot really claim any credit. However, perhaps because the Finance Ministry, in its February update and economic outlook report, had predicted a decline in inflation, the market had begun anticipating a rate cut, probably with the new government, whoever formed it, pressing for a cut. However, one of the factors preventing a cut is the failure of the inflation rate to come in below the interest rate. One of the factors leading to the interest being maintained is that the IMF has recommended that the interest rate only be cut when the inflation rate falls below it. It could be argued that that has happened, and only a literalist interpretation of the condition requires the 1.1 percent difference be considered a violation.
It is still not entirely certain that inflation is going down due to the high interest rate. There is also the factor of political stability, which has presumably arrived after the elections and the formation of the Shehbaz government. The inflation rate, at 23.1 percent, is still stifling. At the same time, the interest rate is a dampener on the economy. Growth is required to keep the wheels of commerce moving, and that cannot be achieved at present interest rates. If the decline in inflation continues, a rate cut will become unavoidable, even according to the IMF benchmark, at the May MPC meeting. Much will depend on the March inflation reading. If it declines by anything like in February, a steep and immediate cut becomes necessary to avoid stifling growth. By the meeting, the MPC should have an idea of where inflation is going for the moth, and should decide accordingly.
