In a rather surprise move the State Bank of Pakistan (SBP) in its recent monetary policy review went on to reduce the interest rate by 50 basis points. While one can somewhat understand the rationale behind it, since this government is now keen to get going with the GDP growth agenda of the country and the fact that from a regional perspective our rate is still on the higher side, but the fear is that the resultant added pressure on the PKR that this cut brings with it and the very timing of taking such a policy plunge, both indicate that the rate reduction may be slightly premature and is likely to backfire rather than paying any real dividends. It would also be pertinent to mention here that spurring growth through monetary policy easing is never a single shot rate tweak, because to be effective it has to work on altering investors’ confidence and perception. To convince them that it is indeed a sustainable process, which is likely to keep going in the downward direction, in order for them to be convinced and undertake any long-term investment commitments. Now one is not too sure whether at this stage, Pakistan even has the room and economic positioning to keep moving in this direction without some serious devaluation, inflation and external account constraints or fall outs. Reason being that the inflation fears in Pakistan are real and rising. With a very below average year in agriculture where almost all the main crops - cotton, rice, sugar cane & maize - stand significantly dented amidst a curtailed governmental mandate on announcing support prices, the food and agri essentials price index is bound to rise further in the coming days, as supplies and stocks become constrained thereby giving further rise to another bout of food inflation. Couple this with a REER reading pointing to an imminent devaluation, the inflation phenomenon will once again be raising its head that could go on to seriously affect peoples’ disposal incomes and livelihoods. We all by now know........

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