The answer to that question yo-yos between yes and no. With trimmed core inflation down by 460 basis points (bps) after the last monetary policy review to 14.7 percent in July 2009, the case for policy rate becomes stronger - especially seen in the backdrop of dismal performance of manufacturing sector amid negative private credit off-take and easing Kibor that has declined by 121 bps since the central banks last policy review.
But, the flip side is that rupees sharp depreciation against the US dollar (down 4.3% after last policy review), surge in global commodity prices (crude oil up 47% since last April 25) and inevitable passing of power subsidy burden to end consumers halts the SBP to opt for an aggressive cut. Besides, the directions of cautious monetary stance are too visible from IMFs recent press release.
The single most important factor that drives the decision of economic managers is the resolution of energy crises. The acute power shortage (roughly 4500 MW) can only be addressed by resolving circular debt that will help add 1650-1900 megawatts and the installation of new power plants which can supply and additional 2000-2500 megawatts in the next 10 months.
But with banking system chocking its credit limits to power sector, IMFs refusal to use its money for circular debt, and the governments inability to extend power subsidy any further, there is no way to resolve this issue but to rationalise electricity tariffs. And considering that the existing amount needs to be settled soon - requiring the government to raise Rs 200 billion from local market, the central bank has little room to cut rates massively.
In addition, the new IPPs/RPPs tariffs, 1.5 - 2 times higher than existing rates, are also likely to keep adding more pressure to inflation. Hence, the argument that while SBP will likely slash rate by 100 bps, calls for 150-200 bps cut are rather unfounded.
FOOD FOR THOUGHT Hidden behind all this talk on July inflation and rate cut is another problem: soaring food prices that pushed CPI higher by 1.5 percent on a month-on-month, overshadowing the 19-month low of 11.2 percent year-on-year headline inflation.
FBS data shows that food prices (1.32% out of MoM 1.54%) led primarily by 14.1 percent hike in perishable food (0.78% out of 1.54%) owing to inadequate storage and transportation infrastructure, which clogs even more in the monsoon season. Although, food inflation may taper off as dry weather sets in August - but that should not keep the governments eye away from effective administration.
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