Finally the time has come when the state bank of Pakistan (SBP) must put its cards on the table about the extent of liquidity it considers necessary for the market at this point in time. Businesses have, quite naturally, been demanding further reduction in the benchmark interest rate, although they know that chances of another cut are practically zero so they would be happy enough if the bank chooses to keep the status quo for the time being. Some pundits, however, are of the opinion that the market has already priced in a 25-basis point increase, considering how the currency is in freefall and inflation has also not come down to desirable levels. Increasing the rate, even a little, at this time would also signal a return to the bailout program, which has been hanging in the air ever since the pandemic forced unprecedented stimulus packages from the government as well as the central bank; and that is always welcome. But it is debatable if jacking up the rate is the right way of controlling inflation at the present time. The price rise is cost-push as opposed to the usual demand-pull variety, so there’s not much aggregate demand that the higher interest rate is going to arrest and bring down prices. Besides, the government has itself blamed interest groups and even mafias for the artificial price inflation, especially in food items. So, a very tough question that the central bank must face is whether or not to smother whatever little demand there is to control inflation and help the rupee when there’s no guarantee that the latter two would respond in the way expected of them. There’s also the latest SBP finding that while last year was very impressive in terms of private sector credit offtake, the few months of the present fiscal have instead seen the same private sector largely retire old loans rather than take new ones. Is this, then, the right time to tighten screws further on liquidity, when fiscal authorities are counting on their ambitious, expansionary budget to get the economy to take off? It’s time for the SBP to show how it feels about the matter. *