Daily Times

Nobody would’ve been really surprised, even if the business community was left a little disappointed, that SBP has raised the interest rate by 25 basis points to take it to 7.25pc. The market appeared to have priced in this increase, yet an interest rate hike is still equity negative, and the benchmark index ended more than a hundred points in the red despite a late rally. So the signal is now crystal clear, even if the SBP’s explanation for it leaves a little to be desired.

It was already time to phase out the monetary component of the pandemic stimulus package, which offered various forms of cheap loans to businesses to survive the storm but also distorted the main interest rate regime, so the monetary policy decision on Monday didn’t really deliver a surprise. But for the Bank to say that the decision was forced because the pace of economic recovery so far has exceeded expectations is more than a little off-point. And there is no “robust recovery in demand” that it speaks of, especially not in consumer demand although the demand for machinery did go up a notch as producers lined up to take advantage of the credit facility. The trade balance is already wrecked, pretty much for the whole year, inflation is cost-push more than demand-pull and tends not to respond very quickly to either way movement in the interest rate, and the current account is still a headache. So where is the roaring demand that the SBP can clearly see in the economy?

The interest rate was brought down from above 13 percent down to seven percent, so it was quite a cut. Yet it was still far above the global as well as regional average as countries raced to zero in the aftermath of the global recession induced by the pandemic. And, because of high inflation, it was already in negative territory, and the differential with other countries triggered a furious carry trade – text book hot money entry into the economy – which first bid up the rupee and then led to its collapse. With the real economy now in a far more vulnerable position than the SBP liked to admit in its report, which in itself is something of a shame, the risk of more carry trade with the rate rising is not as real as it was some months ago. But the hike will put a dampener on private sector credit offtake, which was already on a decline because, as the SBP’s own stats showed just the previous day, 2021 featured borrowing while 2022 has so far been about paying back loans. And that might not be the best news for those counting on the expansionary budget to do the trick. *