Unstable outlook

HAVING slashed its key policy rate by yet another 100bps to 12pc, the bigger question for the State Bank now is whether or not it should pause the ongoing monetary easing cycle, which has seen the rate being cut by 1,000bps since June to preserve the recently achieved fragile stability. Though the bank had long stopped providing forward guidance on interest rates, the latest monetary policy statement and its governor’s post-policy briefing offer some insights into the SBP’s thought process. On the one hand, it believes that a “cautious monetary policy stance is needed to ensure price stability … for sustainable economic growth”. This demands that the real policy rate “remain adequately positive on a forward-looking basis to stabilise inflation in the target range of 5-7pc”. Moreover, the risks to inflation — volatile global commodity prices, protectionist policies in major economies, timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, and any additional tax measures to meet the FBR target — call for a pause on monetary easing, or at least moderation in the pace of rate cuts.