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Inflation targeting-lite: strategic transition or operational stopgap? | The Express Tribune
In Pakistan, tight monetary policy coincides with increasing inflation due to supply shocks, which undermine rate sign
Market analysts caution that IMF-related measures in the upcoming FY2026 budget—particularly new taxes and adjustments in energy prices—may lead to a renewed spike in inflation. PHOTO: FILE
MICHIGAN/KARACHI:
In August 2009, the State Bank of Pakistan (SBP) officially changed its monetary policy framework from monetary aggregate targeting to interest rate-based monetary policy framework called the inflation targeting-lite regime by introducing the interest rate corridor (IRC).
Within international systems, the adoption of IRC would be a transitional move for implementing a flexible or full-fledged inflation targeting monetary policy framework, where the policy rate is used as a primary tool for anchoring inflation expectations (Stone, 2003). Indeed, most of the inflation targeting central banks place corridor systems not only to stabilise overnight rates but to anchor these rates around a policy rate to strengthen monetary policy transmission and policy signalling. This has been quite contrary to the case of Pakistan, where a significant domestic literature and official SBP communication, such as working papers, research bulletin, and policy notes emphasise that the IRC was introduced as a means of reducing volatility in the weighted average overnight repo rate (repo), which has weakened policy signalling and disrupted money markets (Mahmood, 2016).
Moreover, the SBP’s working papers and policy notes also document how liquidity shocks, often driven by government cash flows and FX operations, caused overnight rates to deviate from the policymakers’ desired levels prior to 2009. The objective of reducing volatility in the repo, being operationally valid, goes against the global justification of inflation targeting-lite regime, that is, reduction in volatility is not an objective but a by-product of a smooth and coherent monetary system. Thus, the IRC was implemented into an economy where the macroeconomic conditions for interest rate-led inflation control were partially established.
It would not be the design of corridor which is challenging but the surroundings where it functions. The inflationary trends in Pakistan are heavily influenced by administered prices, especially energy, college tuition, and regulated food items, which can get adjusted through fiscal adjustments but not market forces. These non-continuous changes, which are frequently large and discrete, can undermine the relationship between policy rate and headline inflation. Consequently, the tight monetary policy coincides with increasing inflation due to supply shocks, which undermine interest rate signalling.
Pakistan is simultaneously experiencing the limitations of the monetary policy trilemma. External imbalances and exchange rate pressures are persistent, which often leads to the balance of payments conditioning of monetary policy decisions. Practically, this leads to the phases where interest rate is as influenced by external stability as it is influenced by domestic inflation and output growth. As a result, liquidity shocks are generated by FX interventions that the IRC must absorb to stabilise the money markets. This strengthens the IRC’s role as the stabiliser of money markets and not as an anchor of expectations.
Such limitations highlight why the inflation targeting regime, be it strict or flexible, has eluded it even though this has been expressed in terms of policy aspiration in the SBP’s Vision 2016-2020. Demand-driven inflation, flexible exchange rate, and limited fiscal dominance are the key elements required to stipulate inflation targeting. However, these conditions are fulfilled partially in Pakistan, which results in a system where the objective of inflation targeting exists but with a weak functional core.
Notably, this does not mean that Pakistan should drop the interest rate corridor or adopt monetary aggregates targeting. Neither does it imply that the targeting of inflation should be mechanically adopted and that structural reality be violated. The important step is to implement a transparent and flexible structure, which highlights and acknowledges Pakistan’s constraints and not obscure them.
This type of structural framework whose primary medium-term objective should be price stability, and policy is carried out with clear secondary constraints, the most important of which is external stability and administered price shocks. Rather than a point target, a medium-term inflation rate is announced by the central bank with special concentration on forecasts made publicly available. This will ensure transparency of the framework and add to the credibility stock of the central bank. Deviations that are temporary are acceptable, if they are well explained. This framework would ensure that instead of hidden goals, exchange rate pressures, reserve adequacy, and risk premium are treated as the conditioning variables. The decisions on policy rates have been explained as weighing between inflation stabilisation and external sustainability as a reminder of discretion with accountability. Credibility is anchored on transparency.
In this context, the policy rate role is re-defined. It is no longer supposed to tighten or loosen demand or to counteract the inflation produced by supply mechanisms. Rather, it pegs expectations over the medium term, constrains second-round effects and conveys commitment when the economy is under strain. The interest rate corridor appropriately works as a liquidity management tool, which ensures that there is smooth market functioning with operational control, without the strains associated with the responsibility of macroeconomic credibility, on its own.
In the long run, this structure enables sequencing as opposed to being subject to shock therapy. Reforms in administered pricing, improvement in exchange rate flexibility and reduction in fiscal dominance may relax the constraints on monetary policy over time. Flexible inflation targeting then develops naturally, as a matter of adaptation and not imitation. The introduction of the IRC to Pakistan provides more of a general lesson, that is, the sophistication of operations cannot replace the clarity of strategy.
By taking its monetary framework and its structural realities to be in accord with each other, and by ensuring the trade-offs are clear, the SBP can get closer to inflation targeting, not as an imported model, but rather as a nationally consistent policy regime.
Dr Ateeb Syed is a visiting professor of economics at Grand Valley State University, Allendale, Michigan and Tayyaba Kamran is a research assistant at the Economic Growth and Forecasting Lab, IBA
The London Stock Exchange Group has unveiled plans for a £3 billion share buyback amid pressure from an activist investor and as artificial intelligence fears have hammered the stock.
LSEG said it would follow £2.1 billion in buybacks made last year with another £3 billion by February next year, on top of a hike in dividend payouts.
Details of the pledge to step up returns for investors came as it reported underlying operating profits of £3.51 billion for 2025, up 10.8% or 14.7% higher on a constant currency basis.
On a bottom line basis, pre-tax profits jumped 56.5% to £1.97 billion for 2025.
Shares in the group rose as much as 5% in Thursday morning trading, in a welcome increase after the stock has been battered in recent weeks by global investor concerns over the impact of AI on its firm and data companies more widely.
Shares in the firm, which makes a significant chunk of its earnings from selling access to markets data, have slumped by nearly a third in the past year.
Activist investor Elliott Management has also built up a stake in the firm earlier this month and has reportedly been pushing for more share buybacks as it has held talks with LSEG bosses.
In the face of the recent shares slump, chief executive David Schwimmer said recent results showed “another year of very strong financial performance”.
He said: “In the fourth quarter alone, major financial institutions signed long-term contracts worth £1.9 billion to access our leading data and workflow.”
“With our LSEG Everywhere data strategy, we are positioning ourselves as the partner of choice for licensed, trusted data as the use of AI in decision-making scales – and we are seeing very positive signs of adoption,” he added.
It outlined new performance guidance for 2027 to 2029, with aims to deliver “mid to high single digit” growth in total income and further increase profitability.
Despite taking a significant stake in LSEG, the Financial Times newspaper reported earlier this week that Elliott has made assurances to the UK government over its intentions for LSEG as speculation mounted it would look to push for a break-up of the firm or for it to switch its listing to New York.
Rolls-Royce has revealed its annual profit surged by £1 billion and upgraded its outlook for the years ahead, following major military aircraft orders and soaring demand for powering data centres.
The engineering giant said its business divisions were in a good place to benefit from “key global trends” over the coming years.
It reported an underlying operating profit of £3.5 billion for 2025, a jump of 40% from the £2.5 billion made the prior year.
Underlying revenues surpassed £20 billion over the year, up about a 10th on 2024.
This was driven by profit and sales growth across its civil aerospace, defence, and power businesses.
Rolls-Royce said demand for its defence products was strong and it secured major orders during 2025.
This included contracts worth more than £1.5 billion with the UK’s Ministry of Defence and the US’s Department of War for EJ200 and AE 2100 engines to power military aircraft.
New orders for the Eurofighter aircraft engines from Italy, Germany and Spain, as well as export agreements from Turkey, will drive production into the 2030s, it said.
Furthermore, Rolls-Royce said it was benefiting from growing demand for power generation, driven by data centres with revenues up by more than a third.
Rolls-Royce said it was now expecting underlying operating profits to increase to between £4.9 billion and £5.2 billion by 2028 following the strengthened financial performance in 2025.
This is significantly higher than the £3.6 billion to £3.9 billion range that it had previously been targeting.
Chief executive Tufan Erginbilgic said growth would not have been possible “before our transformation”, with the business making £600 million worth of cost savings since 2022.
“With our new capabilities and mindset, we have navigated challenges from supply chain to tariffs, and delivered a strong performance in 2025, all while we built the foundations for significant growth for years to come,” he said.
“Based on our 2026 guidance, we expect to deliver underlying operating profit within the prior mid-term guidance range two years earlier than planned.
“Beyond the mid-term we continue to see significant growth from existing businesses as well as from new business opportunities.”
Business
RBI’s Rs 25,000-Crore Switch Auction On March 2nd And Its Impact On Bond Markets, Government Debt Strategy | Explained
Last Updated:
RBI Switch Auction On March 2: The Reserve Bank of India will conduct a government securities switch auction worth Rs 25,000 crore on March 2 between 10:30 AM and 11:30 AM
In the latest exercise, all securities, having maturities in FY27, are being replaced with bonds maturing after FY32.
RBI Switch Auction On March 2: The Reserve Bank of India (RBI) will conduct a government securities switch auction worth Rs 25,000 crore on March 2 between 10:30 AM and 11:30 AM, with results to be declared the same day and settlement scheduled for March 4. The move marks the third such operation this month and is aimed at smoothing India’s future debt repayment profile.
What is a switch auction?
A switch auction is a debt management tool through which the government exchanges bonds that mature soon with bonds that mature later. Instead of repaying investors in cash when near-term securities mature, the government offers them longer-dated securities. This effectively postpones repayment obligations without increasing total debt.
In the latest exercise, all securities, having maturities in FY27, are being replaced with bonds maturing after FY32, according to RBI data.
Why is RBI conducting it now?
The key trigger is the heavy redemption pressure expected in FY27, when government securities worth about Rs 5.47 lakh crore are scheduled to mature. By replacing these with bonds maturing after FY32, the authorities are spreading repayment obligations across future years. This reduces refinancing risk and prevents sudden spikes in borrowing needs.
How does it help the government?
India has already budgeted gross market borrowing of Rs 17.2 lakh crore. Large redemptions in a single year would force the government either to borrow more or use fiscal resources for repayment. Switch auctions smooth this maturity profile, making debt servicing more predictable and fiscally manageable.
What has happened so far this month?
Before this latest announcement, the RBI conducted two switch auctions in which securities worth Rs 84,804 crore were bought back and replaced. The repeated use of this tool signals a proactive debt-management strategy rather than a reactive measure.
Why markets watch switch auctions closely
Bond investors track such operations because they affect liquidity, yield curves and supply of long-term securities. Extending maturities can reduce pressure on near-term yields while increasing supply at the long end, influencing pricing across the sovereign curve.
The broader takeaway
The latest switch auction is part of a deliberate strategy to manage India’s rising debt stock more efficiently. By pushing repayments further into the future and avoiding bunching of maturities, policymakers aim to maintain stability in government borrowing costs and ensure smoother fiscal operations in coming years.
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February 26, 2026, 11:11 IST
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