KARACHI: The State Bank finds itself in a dilemma over the interest rate as on one hand the business community is clamouring for a cut of 500 basis points in one stroke, but on the other multinational companies are advising caution.
According to Ehsan Malik, the CEO of Pakistan Business Council (PBC), “the Monetary Policy Committee (MPC) of the State Bank is likely to maintain a cautious approach and leave the policy rate unchanged for now”.
Whilst inflation continues to decline, a key consideration is the forward inflation outlook. On this basis the current policy rate stands at 4pc positive, which the MPC would like to maintain, he added.
“The build-up of forex reserves has slowed down. External financing awaits improved credit rating and a favourable outcome of the ongoing IMF review,’ Ehsan Malik said.
The demand for imports is rising. It is not clear how tariffs would affect Pakistan’s exports to the US. There is uncertainty about the emerging world order. The continuation of commodity tailwinds cannot be taken for granted.
“A further easing of the policy rate could put the rupee under pressure,” the PBC CEO said.
About the outlook for a cut in policy rate, the secretary general of the Overseas Investors Chamber of Commerce and Industry (OICCI), cautioned against goading the central bank to make a hasty decision to cut the policy rate.
“It could be 0.5 per cent, at best. Don’t recommend any reduction so soon. The SBP needs to wait until the next round for any further reduction,” Abdul Aleem said.
Trade and industry `dissatisfied’
The president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) said trade and industry is dissatisfied with the monetary policy since it is based on a heavy premium vis-à-vis core inflation.
Atif Ikram Sheikh described the reduction of just 100bps on Jan 27 as “grossly insufficient”.
The fact that inflation was at a nine-year low of 1.5 per cent last month and 2.4pc in January, the current policy rate of 12pc reflects a premium of 1050 basis points vis-à-vis core inflation, he added.
The FPCCI chief called for an immediate and single-stroke rate cut of 500 basis points at the coming MPC meeting on March 10 to rationalise the monetary policy and align it with “the vision of the Special Investment Facilitation Council (SIFC).
The core inflation is expected to range between one and three per cent in the April-June quarter on the back of declining prices and easing inflationary pressures.
International oil prices are also expected to remain stable, Ikram Sheikh said.
Oil prices are predicted to stay under $70 per barrel in coming months due to an adequate supply in the international market and spare capacity within the OPEC plus countries.
The government now has all the prerequisites to make a substantive interest rate cut instead of holding onto their contractionary and anti-business monetary policy practices, Atif said.
Saquib Fayyaz Magoon, SVP FPCCI, said a single digit interest rate would enable exporters to compete in the regional and international markets by reducing the cost of capital in a meaningful way. The government should also fulfill its promise to rationalise electricity tariff for industry, he said.
Faisal Moiz Khan, the chief of North Karachi Association of Trade and Industry (NKATI), appealed to the SBP governor to bring down the interest rate to 5pc.
“This will not only bring the real interest rate to a sustainable level but also make loans more accessible for businessmen and industrialists.”
Lowering the interest rate to 5pc will also pave the way for investments in the industrial sector and create employment opportunities, for the youth of Pakistan, Faisal Moiz added.
For the fiscal year 2024, domestic debt servicing has increased by 50.4pc, rising from Rs 4.8 trillion to Rs 7.2tr, while the policy rate remains high. This has placed additional pressure on the national budget and further widened fiscal imbalances.
He added that reducing the interest rate acts as a stimulus for economic activities, accelerating growth, enhancing competitiveness, and improving the business environment.
Published in Dawn, March 6th, 2025
