The State Bank Monetary Policy Committee’s cut of its benchmark rate from 11 percent to 10.5 percent would not have been entirely approved by all segments. Even as the business community would have hailed it, the banks would have emitted rumbles of discontent and the stock market would have probably taken a hit. However, the mixed reaction of the business community on one hand, and the stock exchange on the other, indicates that the MPC might have got something right, though not everything. The Karachi Chamber of Commerce And Instry, Korangi Association of Trade and Industry and SITE Association of Industry Presidents all have decried the cut as inadequate. The Stock Market seemed a little more practical, and went up 871 points on the news of the rate cut, to 10,741c points, a new record.
The cut was not expected, because the MPC seems determined to avoid inflation setting in. However, as the inflation rate continued to remain low, and as growth had still not taken off, propping up the rate, though bankers would have devoutly wished it, was not really an option. The MPC’s caution, in which it had taken about a year to halve the benchmark from a high of 22 percent, might be justified for inflation, but without a rate cut, there was the danger of killing off the anaemic recovery the cuts so far had brought. However, the MPC also had to take account of IMF warnings against easing the money supply. The rate cut does mean that the government’s debt servicing expenditure is going to go down, with its consequent positive impact on the primary surplus. Incidentally, that surplus is already more than planned, and was a factor in the cut.
The business community has expressed the need for a single-digit rate, so that it could compete for exports with other South Asian countries, with single-digit rates. What a single-digit rate, all at once, would do to inflation is nobody’s business. It seems a cautious approach is appropriate, and a gradual easing of the interest, though not so slow as to strangle what growth is occurring, seems the judicious approach to adopt. Apart from inflation, other factors, like global oil prices and post-tariffs trade, seem to indicate the not only inflationary fears are receding, but global growth is likely to pick up. That can only be good for business.
