'Far from a soft landing': expert says joblessness, business defaults to rise after rate-hike

The central bank's decision to increase the key interest rate could trigger unemployment and decrease business activity, said a market expert.

In the monetary policy meeting held on Thursday, the State Bank of Pakistan (SBP) increased the benchmark policy rate by 125bps to 15%. Moreover, the SBP also increased Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF) rates to 10%, linking it with the policy rate.

SBP increases key interest rate by 125 basis points, takes it to 15%

The MPC stated, “This combined action continues the monetary tightening underway since last September, which is aimed at ensuring a soft landing of the economy amid an exceptionally challenging and uncertain global environment.”

However, economic analyst AAH Soomro, former managing director at KASB Securities, believes that the central bank’s latest measure “is far from a soft landing.”

In a series of tweets, Soomro said had there been no political vacuum, indecision and passing of rising fuel prices, the impact could have been muted. “Perhaps, dollar at Rs190 and interest rate at 13%.”

However, inflation is currently above 20% and the government's latest measure to impose a hike of Rs7.9 per unit on electricity tariff would keep inflation in FY23 at around 18-20%, he said.

The MPC in its statement highlighted that amid reversal of energy subsidies, both headline and core inflation increased significantly in June, rising to a 14-year high.

“As worrisome as it is, there is no choice,” says Soomro.

"The ongoing commodity cycle and the International Monetary Fund’s (IMF) realisation of policymakers' inability to undertake structural reforms is leading to a hard landing."

The analyst said amid SBP's measures the demand has not moderated but massively contracted.

“At 15%, risk-taking is off. Money will shift to fixed income and away from elevated property prices. Business profits shall disappear and defaults would increase,” he said.

This would lead to job losses, lower business incorporation, decline in corporate profitability and a lack of investor confidence, said Soomro. “Economy needs a reset,” he said.