The slashing of interest rates is a sign of the central bank’s confidence in the federal government’s ability to curb inflation. According to the State Bank’s forecasts, average inflation is going to hover around 11 to 12 percent for the new fiscal.
High interest rates as a tool to fight inflation are a double-edged sword. In principal, the idea is to suck the excess liquidity off the money markets. There was a need to do this after the recklessly lax regulation of these markets in the Musharraf years. In fact, the central bank had started pursuing a policy of tightening the markets well within the regime. And the policy has served its purpose as well. The problem, however, is that excess in money supply is but one cause of inflation. The unidimensional too-much-money-chasing-too-few-goods approach to understanding inflation does not cover many of the cost-push aspects of inflationary trends. Higher interest rates might serve to keep excess money in check but, on the flip side, constrict the level of credit available to businesses throughout the country.
Though the attitude at the central bank about the inflation situation is optimistic, there are still cautions for the government not to get complacent. As acting Governor, SBP Yasin Anwar said, “A meaningful reduction in inflation will require consistent and credible implementation of monetary and fiscal policies.”
The central bank’s usual grouse against the government – excessive borrowing – seems to be resolving gradually. Despite slippages, borrowings have been scaled back considerably. A far cry from the public speculation of the issue being the cause of the last SBP chief’s resignation.
It is hoped that the eased up lending translates into expanded industrial and agricultural credit, not unsustainable consumer credit. We’re still reeling from the effects of the last time that happened.
