The autonomous central bank finally seems to have found its voice. On Monday, the Monetary Policy Committee of SBP cut the benchmark policy rate by 100bps, bucking market expectations of a sharper rate cut. Posterity will determine whether MPC’s decision to persist with a restrained monetary stance against near-universal opposition is on the right side of history or not. What is clear, however, is that SBP is in no mood to stimulate recovery prematurely, only to be held responsible for once again stoking inflationary fire.

Institutions seldom muster the courage to admit to past errors of judgment. Still, it is refreshing to see the central bank learning from them. In taking a cautious monetary stance, SBP must fend off pressure both from the Q-block and market participants. And it is no longer doing half as bad a job at defending its position as had become a norm in the recent past.

The confident tone and calibrated use of language stood out during the marathon presser and analyst briefings. On multiple occasions, for example, the Governor insisted that observers take note of the quality of reserves buildup, which have risen by $5 billion over the last fiscal year. “This was achieved through forex market operations, and not through borrowed reserves as has been the case in the past”. Of course, the fact that much of the repayments made during the period had been financed through external borrowing and rollovers was implicit. But 3 stars for trying.

The SBP team also highlighted - almost with a tinge of pride – that “no FX payments against profit and dividend repatriation, technical assistance, royalty, or airline dues” were pending with commercial banks anymore, and that prior SBP approval was no longer required to process routine payments. The Governor also seemed pleased to note – multiple times – that import restrictions had been ‘completely and fully’ lifted; and that monthly average non-oil import bill had returned to the pre-crisis (read: June 22) level.

But if things are returning to normal – or whatever normal has come to mean for an economy permanently on life support - why then is the MPC so reluctant to bring down interest rates from historic levels. It was natural to find commentators expecting a sharper rate cut noticeably flummoxed, almost wanting to ask: what would be the point to all this caution if we are all dead?

If you are among those inclined to look for signs in policy statements, this is where the bombshell was dropped. Notwithstanding the historic range of positive real rates of 3 to 5 percent, SBP no longer believes that real rates need to be rangebound. It is, however, resolutely committed to achieving its medium-term inflation target of 5 to 7 percent by Sep-25. Four on five, for finally finding a razor-sharp focus and deeply committing itself to its primary mandate of achieving price stability. Better late than never.

There was also much patting on the back for reducing the size of net FX forward liabilities down to $3.5 billion, below pre-crisis levels. Backdoor lending through OMOs was also defended, never mind that ST borrowing from SBP has now come to constitute almost half of the balance sheets for one of the top five banks. It was insisted that the effects of OMO must be seen in the context of NDA and reserve money, both of which are moderating. If inflation is always and everywhere a monetary phenomenon, then SBP appears keen to give itself 5 stars for tightening every screw and tap it can find.

How – and if ever – will it unravel the indirect lending operation to Islamabad went unaddressed. For context, the size of OMOs is now larger than the entire advanced portfolio of all commercial banks put together. In turn, commercial bank lending to GoP is now greater than total deposits held by the banking industry. Of course, the SBP had to stop short of explicitly declaring “it cannot be held responsible for a sovereign gone mad”, but then again, a higher interest rate is the only penalty it can impose on the government, without calling it as such. Either way, the price must be borne by you and me. SBP would rather have you and I pay higher taxes to service domestic debt than for all Pakistanis to crush once again under runaway inflation.

There is no denying that the investor and business classes will bear the brunt of SBP’s extended cautious monetary stance. But the 240 million Pakistanis are also consumers, who desperately need inflation expectations to anchor. Over the 24 months, the reckless fiscal behavior of the sovereign has eroded whatever credibility Pakistan’s macroeconomic managers had been left with. And it continues till this day, whether in the form of development-heavy budgets, self-rewarding schemes for the officers of the Raj, or medieval-style repressive taxation. By committing itself to its mandate of achieving price stability, the SBP is finally doing the bare minimum to restore its credibility. If Pakistan has any hope of exiting the junk bond status by 2025, the Q-block must follow in SBP’s footsteps, not undercut it.