The Catch-22 of growth and inflation – Business

The State Bank of Pakistan (SBP) has raised its key policy rate by 100 basis points to 16 per cent to ensure that the current high rate of headline inflation (26.6pc) doesn’t become entrenched and “risks to financial stability are contained” . The central bank believes that “the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched.”

In other words, the SBP’s monetary policy committee (MPC) has taken a medium-term view of economic growth and not a short-term view. If it had allowed the interest rate to remain unchanged, that might have helped a little in economic growth, but in that case, current high inflation would have become too deep-rooted to be taken care of in future, affecting medium-term growth.