The State Bank of Pakistan (SBP) raised its policy rate by 300 basis points at its latest meeting of the Monetary Policy Committee in order to curb inflation.This decision was made after the same committee denied, 15 months prior, that inflation could become a problem despite obvious evidence of a commodity supercycle driving up commodity prices globally.
The committee even asserted that fuel subsidies were deflationary, but they soon came to understand that the subsidies had the opposite effect and set off a snowball effect that the nation is still struggling to deal with.
It has been claimed that the central bank’s approach to monetary policy is foolish, comparable to fiddling with the hot and cold water faucets while standing in the shower. For more than three years, they have maintained negative real interest rates and printed trillions of rupees, which has increased demand and inflated the informal economy.
Over Rs 8 trillion worth of currency is currently in use in Pakistan, which is nearly 20% of the country’s GDP. This is the sole responsibility of the State Bank.
The informal economy is expanding due to the overabundance of cash in the economy, which is also straining the formal economy. The situation is made worse by the government’s refusal to change its fiscally irresponsible ways.
Raising interest rates won’t magically bring grey cash into the formal economy because the central bank hasn’t made any significant efforts to shrink the size of the informal economy. As a result, more and more money supply is being held outside of the system, which is causing inflation.
The State Bank of Pakistan has failed to achieve price stability, which is the main goal of a central bank. A target inflation rate of 5-7% over the medium term has been consistently extended into the future as the bank’s credibility declines in its subsequent monetary policy statements.
Although Pakistan is exposed to similar levels of commodity and price shocks, its inflation rate, whether headline or core, remains significantly higher than its peers.
As a result of the increase in interest rates, the country is at its highest point in history, and there is no plan in place to deal with this problem. Over 230 million people are on the verge of disaster due to the wasteful government and distant central bank.
The recent increase in interest rates is likely to cause a sizable economic downturn, and before things stabilise, the nation might encounter another sizable inflationary crisis.
A number of criticisms have been leveled against the State Bank of Pakistan’s monetary policy for failing to maintain price stability, negative real interest rates, and an excessive amount of black market money. There could be a significant economic downturn in the future if the recent decision to raise interest rates is insufficient to address these problems.
