Interest rate surprise.

THE State Bank has done it again. For the third time, it has held an unscheduled meeting of the Monetary Policy Committee and decided to slash the key policy rate by 100 basis points. With the move the total interest rate reduction since mid-March, when the lockdowns and disruptive impact of the Covid-19 pandemic hit Pakistan, comes to 625bps. This is, quite possibly, the sharpest monetary easing in the country's history, since it represents a near halving of the policy rate in a matter of three months. And this may not be the end of the cycle either as further rate cuts in the months ahead remain a distinct possibility.

There is little doubt that the situation facing the country calls for extraordinary measures. The rate cuts have been well received by the business community and have had a significant impact in terms of easing debt-service expenditures of the government, though specifically quantifying the impact is difficult. The economy is now in the midst of a slowdown the likes of which we have never seen before, with the growth rate plummeting to negative territory, and the clouds of uncertainty that have produced this plunge far from lifting. At the same time, the global economy is also undergoing a sharp deceleration, with ominous implications for the sources of Pakistan's external earnings: remittances and exports. The optimistic take on elevated foreign investment in FY2020 owes itself almost entirely to the renewal of telecom licences earlier in the fiscal year, so this...