The upcoming monetary policy meeting of the Pakistan central bank is largely expected to keep the policy rate unchanged at its elevated level. It will be a long streak at that if kept unchanged. But if the central bank does make a cut in the policy rate, even a nominal one, that will substantially fuel this market rally.
In my opinion, any rate cut would be at odds with the data stream and would not be taken as a sign of something fundamentally sound by the financial circles. All ills that ail us are still there.
The structural issues in our economic and public finances persist, and the only thing that has changed is that the 'default' word is no longer associated with our external obligations. In addition, the positive tone by the IMF is also encouraging, beyond that, nothing solid.
Our public finances and resources to meet our external obligations, together with the government's development expenditure, have always been reliant on external resources or space provided by external factors. What we need is structural change and a reduction in public expenditure. Instead, we keep focusing on generating and tapping external resources, assuming that this new round of 'injections' will induce sustainable forex earnings.
International liquidity flow into our system that was not related to economic activity has been concealing our structural economic issues and unsustainable public finances. And has resulted in asset price inflation. This feels good for a certain time, but the 'years after' have always been painful, and the pain is increasing with every cycle where we fail to channel the liquidity flow into the productive and economic space. More on this later, following my preference of keeping posts short.
A rate cut will certainly create a sense of ease, but nothing real. This would primarily be reliant on a decrease in pressure on our external finances due to further IMF engagements. The central bank would do best to just focus on data rather than anything else.
See the 5 years chart of Pakistan Policy Rate.
