Markets had priced in another rate hike, but the Monetary Policy Committee of the State Bank of Pakistan took a more hawkish position than the expected 100 basis point rise, increasing the benchmark interest rate by 150bps. It’s clear that Reza Baqir’s departure from the central bank hasn’t changed its position at all and it will continue to move aggressively to mop up any excess liquidity in the system to trim aggregate demand as much as possible. That leaves the finance ministry to play catch-up; pretty much like it was doing before the change of command in Islamabad because this government, too, is apprehensive about the kind of backlash fiscal tightening is sure to invite. The problem, though, is that even such aggressive monetary contraction is likely to do very little to contain the overall situation. Prices will still rise because the government will eventually have to remove the fuel and power subsidy, which means interest rates have further upside left in them. Where does that leave the private sector, which is supposed to lead the turnaround in employment and growth? In our effort to contain inflation, even as we fish desperately for fresh loans, we are very likely to achieve only suppressing growth as prices continue to rise. The interest rate tends to lose its value as the top inflation-fighting tool when the price hike is cost-push instead of demand-pull; as is predominantly the case in Pakistan. The best-selling thesis is that reforms and then growth is the only solution. But that begs the obvious question of how to incentivise reforms when businesses are forced to shrink because of the rising cost of credit? The sad but very obvious truth is that Pakistan is now pretty well entrenched in this vicious circle of low growth, low productivity and persistently high prices. And the only way to get out of it is a long-term plan to reform, revitalise and grow. That things will get worse in the weeks and months to come is all but assured. The main question now is whether they will get any better later? *