A monetary policy committee that took 14 months to double the policy rate between 2022 and 2023, has managed to cut it by nearly half in under eight months. Even at 12 percent, purveyors of tezi shall insist that the policy rate is still too high, at least by historic averages. On the other hand, by lowering rate consecutively sixth time in as many meetings, the central bank has cut the finance cost by half for both the government and the private sector.This has been achieved in record time and at an alarming speed, outpacing the rate cuts seen during the pandemic era.Is the MPC being overly cautious, or over-correcting past contractions?
A central bank leadership that dramatically brought the economy back from the brink of default deserves both our appreciation and our faith. But – and admittedly, it is a big leap – if it is under pressure from powerful quarters to quickly bring the borrowing rate back into single digits - never mind inflationary expectations – then it also deserves support in helping build a counternarrative to fight back. With yesterday’s policy statement, Pakistan’s macroeconomy has once again returned to the figurative crossroads, where future decisions shall determine whether it stays the course of sustainable growth or returns to the tried and failed path of chasing rapid growth, unsustainably.
The change of tone in the carefully crafted policy statement indicates that the MPC acutely appreciates these risks. For example, the SBP reiterated its concerns over elevated and stubborn levels of core inflation, which has failed to fall in line with the headline rate. For the first time in six meetings – since it first started cutting rates in Jun-24 – the MPC emphasized the need for a “cautious monetary policy stance”. After delivering an average of 180bps rate cut in each of the preceding five meetings, the rate cut slowed down to just 100bps. The SBP expects the Jan-25 headline CPI number to clock in under four percent, so it knows that the calls for easing monetary settings will only get louder. Yet, it seeks to stand steadfast, hammering the point home that “the real policy rate needs to remain adequately positive on a forward-looking basis”
If SBP is truly under pressure, its consideration set appears obvious (at least somewhat). Despite significant easing, real GDP growth appears to be underperforming – at least as indicated by major crop estimates and LSM outturns. Both Q-block and business chambers are holding the bankers at Chundrigar responsible for restraining growth momentum. The SBP probably sees things differently, buoyed by forward-looking indicators such as rising imports, POL sales, and fertilizer offtake. The central bank seems to believe that positive developments such as prudent current account management need to be consolidated lest the economy is overstimulated, too soon.
But the micromanagers[sic] in the twin cities are getting impatient. If all the signals – from the stock market, remittances, to current account and primary balance are blinking green – why not throw caution to the wind already?
It is often said that successful leadership is often an outcome of smart stakeholder management, while decisions are only right or wrong in retrospect. How much more room the SBP has to lower the policy rate while maintaining a real rate positive on a 12-month forward-looking basis is indeed subjective. After all, no one has a crystal ball.
Yet, stakeholder management demands that the central bank successfully explain to twin cities the unsavory choices available to them. SBP is already flirting with fire by letting REER climb in the face of the strengthening US dollar. From here on, the choice between currency depreciation and lower interest rates is all too binary. If it is exchange rate stability that the real decision-makers seek – especially given its quicker transmission into price levels across the broader real economy – then caution is at least demanded on the monetary front.
It is all too possible that the assumptions made here are way too generous. It is also possible that the central bank is clamoring to climb onto the growth wagon, restrained only by the upcoming IMF review. If that’s the case, then a prayer. By the time the current SBP leadership bows out in mid-2027, it must not only safeguard the hard-fought gains from unraveling but also strive to leave behind a legacy untarnished and a reputation that withstands the test of scrutiny.
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