It appears Pakistan’s economy has finally caught a break. The policy rate cut by the central bank is expected to act as a long sip of water for the parched trade and industry sectors. The business community, long crying for relief, now has a reason to cheer. However, the more pressing question is whether it is wise to celebrate prematurely without measuring the depth of the well the bank is drawing from.

The State Bank of Pakistan has trimmed the interest rate down by 100 basis points to 11 percent – the lowest since December 2021 – after keeping it unchanged at 12 percent for three months. The welcome shift gives the monetary relief that many in the market had quietly hoped for. The bank justifies its decision with hard numbers. Still, a few cracks are visible under this carefully constructed optimism.

Yet, the numbers tell a story that demands a closer look. Inflation has fallen off a cliff to hit just 0.3 percent year-on-year in April, but it is largely thanks to one-off adjustments in terms of electricity subsidies and lower commodity prices, along with a favorable base effect from last year’s peak. Remittances have given the current account a rare surplus of $1.2 billion in March. But this surge, too, seems to lean more on luck than on productivity. It only shows that the fundamentals, despite improvement, remain brittle.

The central bank insists its policy stance remains “measured” and that real interest rates are still positive. However, the Monetary Policy Committee statement itself hints at risks ahead, from widening tax shortfalls and rising debt repayments. These are no small concerns and can undo the hard-earned progress if not addressed in time.

The central bank deserves credit for making a call when it counts. It has done its part and passed the ball to the rest of the system. It is now up to the fiscal policymakers and the broader economy to make the most of this breathing space before the next test arrives

To make matters worse, Moody’s has issued a warning. The global rating agency has flagged the rising tensions with India as a serious threat to Pakistan’s economic revival. Given the geopolitical tensions and the ever-looming threat of other external shocks, the central bank cannot afford to lower its guard. It must remain prepared to tighten the policy once again should clouds return.

Still, the current momentum offers some reassurance. Inflation is retreating, while the market's sigh of relief is also audible. However, let’s not count the chickens just yet. Pakistan’s room to maneuver remains limited under the current circumstances. The safety net — largely in the form of IMF support and stable remittances — may be thinner than it appears.

For now, the central bank deserves credit for making a call when it counts. It has done its part and passed the ball to the rest of the system. It is now up to the fiscal policymakers and the broader economy to make the most of this breathing space before the next test arrives.