A high policy rate is not solely about getting inflation back to a certain level, and the solution does not lie solely with the central bank.
The high level of inflation that we face, reflects issues with our public finances rather than external factors. International commodity prices have been declining for the past year, yet we have not seen a corresponding decrease in domestic inflation.
Even if international oil prices fall to a level that provides relief from inflation and external obligations, it will not address the structural issues that have driven interest rates to their current level. In fact, during the 1990s, when oil prices were at record lows, we were still experiencing severe balance of payments issues.
Furthermore, our inflation isn't solely due to "supply chain constraints" – a buzzword for presentations and policy notes, alongside other terms such as "measured approach" and "V-shaped recovery." Limited by current economic jargon, the SBP resorts to the mantra of fighting inflation with high interest rates, maintaining them until inflation declines.
Improved performance in the agricultural sector can help alleviate the inflationary environment to a certain extent, but it cannot address the core reasons behind current inflation and corresponding interest rate levels.
The recent figures showing a current account surplus reflect a chokehold on the economy rather than any improvement in the fundamentals.
The central bank can see the demand destruction all around but has nothing to flag but inflation, as some malady with sources outside the economic body. This creates a false impression that any decline in inflation means that the policy rate as a tool is working.
Our issues run deeper. Recent political turmoil resulting a loss of confidence in the system, combined with the cessation of foreign non-economic flows, and the insatiable appetite of circular debt that keeps mounting as political objective to provide relief to the masses remains paramount. All these factors have exacerbated the situation to a breakdown stage. The high interest rate reflects this reality.
Central bank's options are limited anyway. Rather than being in a driving seat it merely reacts to the economic parameters, though speaking a language of keeping a careful watch. We have learned to pore over its written statements but fortunately still have not entered the rabbit hole of discussing every nuance of committee members utterances or threadbare analysis of detailed minutes of meeting. Thankfully, we haven't yet succumbed to this prevailing tendency around the world.
Don't assume that the global financial media's discussions on central banks' stances are relevant to the interest rate outlook. Remember how Greenspan was worshiped on a pedestal and then his statue too was brought down
The rates are set primarily by the market. And the market is constrained by the economic system that brings liquidity to the market. Unless that economic machinery comes back to a certain order in Pakistan the policy rate will keep reflecting its breakdown conditions.