There is a lot of ‘leh deh’ in the air again. That peculiar mix of hedging, hoping, and half-hearted rationalization that defines Pakistan’s monetary stance every time a policy inflection point arrives. The SBP is sitting at an interest rate of 11 percent, inflation has collapsed into single digits, liquidity has rebounded, and yet the MPC cannot bring itself to commit to a rate path. It wants credit to revive without easing financial conditions. It wants inflation credibility without policy coherence. And it wants to signal tightness while acting loose.
This is not conservatism. It is incoherence. And if left uncorrected, it will pave the way for a fresh round of inflationary, debt-financed populism, this time not because SBP loosened too much, but because it remains indecisive for too long.
The disconnect is basic. SBP says inflation is anchored within its medium-term band of 5 to 7 percent. That is the premise on which its entire forward-looking posture is based. But if that is true, then why maintain real interest rates of 4 percent or higher? The only two possible explanations are: (a) SBP does not trust its own inflation forecast; or (b) it is targeting something else entirely, such as external stability, fiscal rollover, or FX accumulation, but without saying as much. Either way, the signal is muddled.
Let’s be blunt. If MPC expects inflation to average in the vicinity of 6 percent and believes, like most inflation-targeting central banks, in maintaining a positive real rate of 2 to 3 percent, then the implied nominal policy rate should settle somewhere between 8 and 9 percent, especially when inflation expectations are well-anchored, which SBP claims are. That should be the target nominal rate. Whether we get there in two months or six does not matter so much. What matters is that the market knows where we are going. Because right now, there is no anchor: just vibes, surveys, and institutional hesitation.
Even if SBP refuses to say it, the logic is inescapable. Nominal GDP targeting - a framework that many economists view as superior to narrow inflation targeting – implies a 10 percent nominal growth path (4 percent, sustainable GDP growth target + 6 percent inflation). In such a setup, the neutral nominal rate should align with nominal GDP growth minus a small buffer. That’s your 8 to 9 percent range. It is embedded in SBP’s own macro assumptions. The only mystery is why they would not connect the dots publicly.
Meanwhile, liquidity has already eased. Reserve money and currency in circulation are climbing fast, both up over 13 percent (YoY) since the start of the year. Broad money is not far behind, growing at nearly 12 percent. Yet, private sector borrowing remains frozen. Banks, as usual, have become an easy dartboard, accused of laziness, risk aversion, and an unshakable addiction to risk-free returns.But this is not just about banks. A deeper question remains.
Is it that banks do not want to lend, or that borrowers do not want to borrow at 11+ percent? Is it the cost of credit, or the absence of investment-worthy opportunities? More likely, it is neither — and both. Private borrowers are not price-inelastic; they are waiting. Waiting for SBP to clearly signal where interest rates will level off. Until then, expansion and capex decisions remain on hold, not abandoned. That is exactly why SBP needs to stop hedging and start anchoring expectations. Without that, liquidity will stay passive, credit transmission will remain broken, and investment revival will never truly begin.
Worse, SBP’s ongoing FX accumulation, its quiet but aggressive dollar-buying spree, is injecting even more rupees into the system. Buying dollars expands SBP’s liabilities and raises reserve money. It is monetary easing by stealth. At the same time, SBP is lending to banks so they can finance government borrowing through T-bills and PIBs. That liquidity shows up in M2, not M0, because the government spends it into the economy. But it has not become inflationary, yet, because so far it remains locked in the investment side of bank balance sheets. It it not moving or multiplying. It is just monetary expansion without velocity.
So what happens when you flood the system with liquidity but refuse to cut rates? You do not get growth. You get speculation. You get more money chasing fewer goods. And you get asset price distortions without output recovery.
The real cost of this delay, however, is not monetary, it is political. The fiscal side is out of patience. With SBP stuck in analytical gridlock, the government is on a spree of launching its own stimulus bonanza: markup-free EV financing, concessional agri credit, fan replacement subsidies, and more on the way. This is how it begins, not because the central bank is reckless, but because it is absent. If monetary policy does not lead the recovery, the budget will. And it will do so the only way it knows how: badly, expensively, and “inflationar-ily”.
We may argue that with monetary aggregates already rising, there is no need to cut rates. That misses the point entirely. Liquidity is present. But it is not circulating. It is not underwriting new credit. It is not generating income or jobs. A rate cut does not flood the economy, it activates dormant liquidity. Imagine a full water tank with the valve shut. The crops are still wilting. This is what happens when SBP behaves like it has options. It does not.
If the Bank believes inflation is falling, then act like it. Cut 50 or 100 basis points. Or signal the terminal rate. If it does not believe its own inflation forecast, say that too, and explain why. But this “leh deh” indecision is the worst of both worlds. It paralyzes private credit. It forces fiscal overreach. And it guarantees that the eventual correction, whether on the monetary or political side, will be costlier than it needs to be.
BR Research is not arguing whether in its MPC meeting later this afternoon, SBP should cut by 25bps, 50bps, 100bps, or not at all. What it is arguing for is clarity, coherence, forward guidance, and most of all, a loud and unambiguous signal about where the terminal rate lies, what the path to it looks like, and what contingencies the central bank has planned in case inflation outturns do not behave as expected. Without that, uncertainty will continue to choke private sector decision-making. And no amount of liquidity or fiscal patchwork will compensate for it.