The CPI Inflation last month fell to its lowest in the past five years. Given this subdued tally, full-year CPI will likely fall below the 9.5 percent target, set by the State Bank of Pakistan.
In fact the average rate of inflation has hovered about 200 basis points below the discount rate for the past nine months. Does that warrant an ease in the policy rate on Friday?
The answer is an unequivocal, no!
Relying solely on the inflation numbers, the central bank may have room to cut the discount rate by 50 bps. But there are bigger concerns; like staggering fiscal deficit and dicey balance-of-payments.
M2 has grown by 8.82 percent in the ongoing fiscal year to-date, compared to 8.02 percent, last year; with government borrowing largely to blame for the increase. Over this period, successive rate cuts have failed to revive private sector borrowings.
Moreover, with mushrooming NDA and dwindling NFA, the next IMF payment due in May might further deteriorate the ratio with its consequent impact on the exchange rate. And this is the strongest argument against slashing the discount rate.
Domestic businesses are increasingly benchmarking foreign exchange rates; not domestic inflation rates. Further, the trend of deficit in the current account seems to be begging for the release of Coalition Support Fund in earnest.
BR Research conducted a survey of banks and brokerage houses regarding their expectations from the upcoming MPS announcement. All the respondents expect the SBP to maintain the status quo, come Friday.
Economic crises in the country have usually emanated from worsening external balances. The central bank must be cognizant of this lurking threat and focus its attention on the rupee-dollar exchange rate; even at the expense of a higher cost of borrowing.
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