The danger of inflation creeping back up, after the CPI reading for December of 6.1 percent, seems to have receded, with a reading of 5.6 percent for January. It could be argued that this justifies the light leash the State Bank of Pakistan has kept on money, and its refusal to bring interest rates below the 10.5 percent it has brought them to, but it could also be argued that SBP is flirting dangerously with a deflation that could lead the economy into a recession. There was the threat of inflation caused by the monsoon floods, but that seems to have receded with the latest inflation figures. Indeed, the possibility arises that the inflation caused b y floods may be a bogeyman used by the IMF to scare the SBP into keeping up interest rates. It should be remembered that the Prime Minister himself has called for a rate cut, but the IMF has advised against it.
The government has two major reasons for wanting a cut: first, it will drive down debt servicing costs, which will help it ease its budgetary difficulties.; second, it would stimulate growth, something the government badly wants, for it would provide more money in the pockets of voters, as well as moe jobs for them and their children (who also have a vote). There is the secondary reason that the business community has vociferously demanded a rate cut, with some business leaders vowing not to rest until they got it into single figures. The SBP has said that growth seems to be higher than anticipated, which seems like a claim that the current interest rate was not a drag on growth, and further that any further stimulus to the economy would risk overheating it. The SBP satisfied itself, at its recent Monetary Policy Committee meeting, with cutting the Cash Reserve Ratio by one percent, which has already acted as a stimulus, as it has made banks now seeking opportunities of lending, so that they keep profits at present levels.
However, all said and done, the SBP’s MPC will face increasing pressure to ease interest rates. There is also pressure coming from the India-EU deal, as well as the relief India has got over tariffs from the USA. Exporters especially are going to be hard hit by these developments, and even if there is a pickup in consumer demand in the USA and Europe, exports may continue falling.
