Soon the State Bank of Pakistan (SBP) will have to decide what to do about the interest rate. It could take comfort in the fact that headline inflation was recorded at 9pc in September and 8.9pc in October and hold the policy rate where it is at 7pc. That would be in keeping with the Bank’s accommodative stance ever since the pandemic came, even if it seemed like the definition of a policy hawk before it. But it must still worry about food inflation, particularly the trauma it is causing in the periphery. It must have hoped that the government would succeed in bringing down prices of at least what and sugar after green-lighting urgent imports, but prices didn’t really stabilise even after the shipments came. Only time will tell if SBP considers this big enough a problem to jack up the interest rate because of it and nip any hope of a soft economic recovery right in the bud.
It seems that the low interest rate regime is beginning to bear fruit, so now would probably be the worst time to reverse it. There has been a notable uptick in industrial productivity, which means producers have taken advantage of the concessionary lending not just to pay back old loans but also to expand. It has also helped, to no small extent, that government borrowing has not crowded out private sector borrowing so far. And now that another economic and financial squeeze is likely to come as the second wave of the coronavirus intensifies and more and more of the economy is forced shut to control it, it would help for money to be as cheap as possible for entrepreneurs.
This is no doubt a very crucial moment in the country’s history. This virus has already humbled the economies of far more powerful and rich countries. Pakistan has done better than others so far, and in no small part because of the proactive nature of SBP policy all along, and everything must be done to protect whatever advantage is still left. It would seem that the Bank exhausted its ammunition in the last round, but it can still keep rates low and encourage businesses to stay open and keep working. That in itself could make the difference that is needed.
Source: https://dailytimes.com.pk/691997/how-sbp-can-help/