As expected, the sharp decline in May’s inflation data to 11.8 percent, the lowest level in thirty months, has given detractors of the State Bank’s strict monetary policy stance the justification to more vehemently advocate for a reduction in the 22 percent policy rate. They contend that SBP needs to start changing course because real interest rates are currently above 1,000 basis points in the future. Additionally, they argue that rate reductions would lessen the “stress” on corporate borrowers and contribute to a reduction in our rapidly increasing domestic debt obligations. corporate debtors and contribute to reducing the payments on our mounting domestic debt. This argument, however, ignores the stronger realities that support maintaining a stricter policy posture for the time being.
First off, real rates continue to be negative annually despite a faster-than-expected decline in May’s inflation rates because of a high base effect and declining food and fuel prices. The average 11-month CPI inflation rate is still as high as 24.52 percent, down from 29.16 percent a year ago. Furthermore, the non-performing loan portfolio of commercial banks, which is less than 8 percent — below its historical norm — emphasizes that businesses are not under extreme stress due to record-high interest rates and excessive inflation. Furthermore, there is no proof that, in the current political-economic climate, the availability of cheaper money will encourage private investment. There is a widespread concern that lowering interest rates will increase imports and deplete our limited foreign exchange reserves, placing pressure on the currency rate and raising inflation. Will the SBP give in to political pressure and lower rates, particularly given that economic stabilization measures like raising the consumption tax, petroleum levy, and power prices to meet the objectives of the upcoming IMF program are expected to cause inflation to exceed the suggested target of 12 percent for the upcoming fiscal year? When the next monetary policy is revealed on Monday, we will be informed.
