As expected, SBP has maintained the policy rate at 22 percent. However, the implied forward guidance (the language of the statement) is not as inclined towards monetary easing as was the case in the previous monetary policy decision.
Although there are no major shifts in inflation outlook, the statement on Monday is more aligned to the prescriptions of the IMF, which forces speculation that the statement has been made to appease the Fund, given the Fund’s review is just around the corner.
Globally, inflation is not falling at a pace that central banks had earlier expected, and the pace of easing in developed economies is now projected to be slower than earlier expectations. Monetary policy committee members’ confidence of permanency in the slowdown of inflation is not as high as it was felt in the previous meeting.
The past governor SBP once commented that central banks are like ocean liners, and they take time to change directions. SBP’s team today perhaps is thinking along the same lines. The cut would be the first one since 2020 (Covid days), and SBP is extra cautious in its approach, and must be absolutely certain of the pace of the fall and sustainability of the disinflation, before making the first move.
Both the central bank and the market believe that the pace of inflation is declining – primarily due to the high base effect. The continuation of fall must be monitored by closely observing the month-on-month changes over the coming months. If inflation in March (expected at 20.5 percent) and April is at below 20 percent, the first-rate cut could be in the next policy review.
The recent increase in food prices due to Ramazan is a slight concern. Moreover, energy prices are not declining globally, therefore, there are risks to fiscal target of keeping circular debt growth under control. The good news is that core inflation is coming down, and that is an encouraging trend.
The growth story revolves around agriculture which is growing over very low base and better soil conditions – both factors attributed towards last year floods. Agricultural growth is translating into higher food export growth and lower food inflation at home. Enabling growth in other sectors requires allowing imports to flow in freely, which can increase the SBP cannot afford.
Upcoming debt payments in the next quarter include the $1 billion market-based bond dues. And SBP is keen on building SBP reserves (around $9 billion, as per Governor by June -end) which are currently at $ 8 billion.
The current account is in a sweet spot and SBP may want the deficit to remain near zero, till the reserves are built. Hence, SBP must remain extra careful towards easing, as the country simply cannot afford any demand spur to disturb the nascent recovery.
The new finance minister also desires to bring permanency to the recently achieved macroeconomic stability before eyeing sustainable growth. Hence, monetary easing would be slow and (hopefully) steady.
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