Recently, our business community has strongly advocated for lowering interest rates. While cheap credit is tempting for businesses, mistimed rate cuts can quickly turn problematic for the SBP. This brings us back to a question central bankers have long grappled with: to cut or not to cut?

Expectations for a significant rate cut have risen. Pakistan’s policy rate currently stands at 11 percent, down from a peak of 22 percent in June 2024. The State Bank has already delivered 1,100 basis points of cuts in just over a year. Now, businesses are pressing for rates to drop to 5-6 percent, representing another 500 to 600 basis points reduction, bringing borrowing costs even lower than the 7 percent emergency levels during Covid-19.

This demand would be appealing if inflation hadn’t surged following the recent petroleum price hike. Just as business leaders intensified their push for ultra-low rates, Pakistan’s dependence on imported energy provided a sharp reality check. The government increased petrol prices by Rs8.36 per liter and diesel by Rs10.39 per liter from July 1st, lifting fuel costs to Rs272.98 and Rs266.79 per liter, respectively. This timing is especially troubling, as Pakistan’s Sensitive Price Index jumped by 4.07 percent.

Gas charges surged 29.85 percent, electricity by 21.46 percent, and even tomatoes increased by 22.93 percent due to higher transportation costs. Of 51 tracked items, 14 increased, while only 12 decreased.

Drastic rate cuts could quickly overheat the economy, yet the business community’s requests aren’t entirely unjustified. Pakistan’s exports rely heavily on textiles; while Vietnam maintains rates at 6.3 percent, Indonesia at 6 percent, and India at 5.5 percent, Pakistan’s 11 percent rate seems excessively harsh. For textile exporters operating on slim margins, a 5 percent difference significantly affects pricing competitiveness.

The potential upside of sharp rate cuts appears immediately attractive. Auto financing has already demonstrated this; cutting rates from 22 percent to 11 percent sparked seven consecutive months of........

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