The market seems to anticipate another 100-150 basis point hike in the interest rate at the Monetary Policy Committee (MPC) meeting at the State Bank of Pakistan (SBP) today, which makes sense on paper considering that inflation has breached the 20 per cent barrier after decades and there’s little to suggest that prices will come down in a hurry. Besides, high prices are now an established global phenomenon and more than 60 countries have already raised rates this year, most of them pretty aggressively, so there’s little to suggest that Pakistan should adopt a different course. But there’s also another argument that the state bank will no doubt consider before announcing its decision later in the afternoon. With the benchmark interest rate at 13.75 per cent and the last fiscal ending with inflation hovering around 12.2 per cent, real interest rates were still positive. And that has changed very drastically in a very short time. Now, even a 100-150bps jump would keep real rates deep in negative territory. Let’s not forget that the bulk of this trend owes only to food and energy prices – core inflation, which excludes these heads, is still 11 to 12 per cent-so now we’re in a rush to raise rates enough to contain supply-side, cost-push inflation by depressing demand; which stops making sense beyond a certain point. It’s not possible to hike the rate all the way to 20 per cent in the near future, of course, but even as we inch it higher we induce trauma into the real economy without addressing the question of when we will stop destroying aggregate demand to soothe supply-side pressures. All the subsidy cuts, tax breaks and fuel price hikes are also adjustments which limit demand, and also cause inflation, so there’s enough trauma in the economy without raising rates anymore. A lot of businesses are, therefore, hoping against hope that the SBP will lean towards this argument today; even though it is very, very unlikely. *