SBP’s dilemma: to cut or not to cut interest rates

WEB DESK: As the Pakistan State Bank (SBP) gears up for its forthcoming meeting on Monday (tomorrow) to decide the benchmark interest rate for the next six weeks, a split among experts has emerged, intensifying the anticipation surrounding the outcome.

With the current rate set at a record high of 22 per cent, nearly half of financial experts and major investors are advocating for a rate cut, while the remainder anticipate the SBP maintaining the status quo, said a news report by Express Tribune.

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The SBP’s recent monetary policy decisions reflect a shift towards a more cautious stance on inflation control, potentially influenced by the conditions of the International Monetary Fund (IMF) loan programme.

Proponents of a rate cut argue that the high interest rates are stifling economic growth, severely impacting government finances and burdening businesses with increased debt restructuring. Sectors such as cement, fertilisers, petroleum, electricity, and automobiles are experiencing suppressed demand due to the high financing costs.

On the other hand, those advocating for maintaining the current rate argue that doing so aligns with ongoing negotiations with the IMF, particularly concerning the final tranche of $1.1 billion and the prospect of securing a new, larger, and longer package once the current $3 billion programme concludes in March-April 2024.

Amidst this split in the market expectations, the central bank is most likely to take a data-driven approach to decision-making, considering the downward trajectory of inflation alongside stabilising global commodity prices and the rupee’s strength against the US dollar.

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At the same time, key risks to this outlook include delays in IMF fund releases, potential demands for additional tax measures to meet revenue targets, and pressure on the rupee against the dollar due to delays in securing dollar inflows. Whether the expectations of inflation to reduce materialise or not also remain to be seen.