SBP cut – a double-edged sword


The stock market has been understandably edgy the past couple of days as the state bank mulls another rate cut, mimicking the regional growth-first mantra, even as critics warn of added pressure on the fiscal deficit. It’s hard to disagree with stakeholders stressing the futility of such exercises so long as the government is unable to cure its addiction to daily debt, crowding out the private sector from the money market and compromising a promising opportunity to stimulate investment, employment and consumer activity.
Also, what might suit Thai, Malaysian and Australian economies might not necessarily prove the elixir of life for ours. In none of these economies is the centre’s fiscal position so unnecessarily compromised as ours. In none does incorporating an easier monetary outlook fail to impress the private sector. In not one of these examples is the government’s position so ridiculously large in the money market. And no other capital lets the government willingly feed hemorrhaging state enterprises and make up by borrowing from banks. The interest rate is not just a boardroom decision. It turns the tap, either way, on a host of inter-related factors, and no part of the cycle functions in isolation.
Those with sound memory will remember how ineffective monetary policy proved all the while the number was jacked up, resulting in an inability to control inflation even as private sector participation nearly ground to a halt. Disrespecting market dynamics on the way down will only exacerbate the problem. If increased liquidity is not quickly channeled into productive investment that engineers the second-round multiplier, it will feed into cost push inflation, choking middle and lower income groups already squeezed by rigid wages and an inhospitable jobs market. The central bank is playing a dangerous game. It’s far more prudent to create the environment where toggling the interest rate is likely to have on-ground results.