Unchanged policy rate

WITH inflation predicted to start easing, the decision taken at the State Bank’s monetary policy committee meeting to hold the key interest rate steady — for the fourth time since June — shows that the SBP is not willing to leave the goal of price stability to chance this time. Its position might appear hawkish and a case of once bitten, twice shy in view of a more stable currency, positive 12-month forward real interest rates, reduced global oil prices, a successful IMF programme review and the forecast that inflation will taper off in the coming months. Meanwhile, the depressed growth also makes a case for a rate cut. However, others argue that both headline and core inflation readings remain high, reserves are falling as foreign official and private inflows dry up, and exchange rate stability is still fragile. A shift to monetary easing at this time, therefore, might potentially result in a spike in imports, resulting from pent-up demand and lead reserves — which are barely enough to cover two months’ imports — to drain quickly. This could cause the exchange rate to deteriorate and the current account deficit to widen, thwarting efforts to tame prices.