HE market did not anticipate it. And only a handful of analysts thought the State Bank would slash borrowing costs that too by 50bps at the most. The majority assumed that the escalation in border tensions with India would keep the central bank from cutting its key policy rate. They believed that mounting tensions between the two nuclear rivals could potentially underpin inflation risks, strain Pakistan`s budget, impair the country`s access to external financing and weigh on growth. Moody`s, one of the top three global rating agencies, also highlighted these risks to the economy amid the growing tensions. In a note released hours after the announcement of a rate cut of 100bps by the bank to 11pc, Moody`s stated: `Sustained escalation in tensions with India would likely weigh on Pakistan`s growth and hamper the government`s ongoing fiscal consolidation, setting back Pakistan`s progress in achieving macroeconomic stability.` However, it seems that the same factors that the analysts believed could prevent a rate cut have influenced the bank`s decision to the contrary. Far less serious risk threats like the US tariffs had forced the bank to act cautiously and pause its monetary easing cycle in March after six straight cuts of 1,000bps since last June.

The rate reduction aims to inspire confidence in the markets about the `sustainability` of the current economic recovery amid India`s growing war rhetoric, which has led to a further downgrade in diplomatic ties, unilateral action by India to illegally `suspend` the Indus Waters Treaty, and reports of a military build-up on its side. If anything, the rate cut is a timely decision to protect Pakistan`s fragile economic recovery from the uncertainty created by India`s actions.

That said, it would not have been easy for the State Bank to send across this message to stabilise market sentiments had headline inflation not dropped to 0.3pc last month and had the current account, supported by robust remittances and lower global oil prices, not posted a hefty nine-month surplus of $1.9bn. There is no doubt that the economy has taken a major step back from the brink, with macroeconomic indicators improving, inflationary pressure easing and foreign exchange reserves increasing. This is acknowledged by Moody`s as well as other international rating agencies, leading to recent upgrades in Pakistan`s sovereign ratings. Yet growth prospects remain depressed and foreign debt payments continue to weigh heavily on the slowly rising international reserves despite a record increase of over 30pc in workers` remittances and the central bank`s forex purchases from the market to meet debt obligations. Indeed, military conflict with India would interrupt Pakistan`s journey towards sustained recovery and growth. But New Delhi must realise it would not spare the Indian economy either as pointed out by Moody`s.