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No change in rates. But there is a surprise in the policy statement. For the first time in the history, SBP is providing forward guidance on the monetary policy. That is in line with the thinking developing in many central banks. It gives a message of stability. Volatility is a killer. SBP has (almost) said explicitly that till May 2021 the policy rate shall remain unchanged. The accommodative stance may even go beyond. And any change thereafter would be measured and gradual.

This should shut the rumors mill. Yes, IMF is coming; but not with a prescription of rate hike. Electricity tariffs are increasing but will not take inflation too high. Yes, imports are growing; but SBP will not burn its foreign exchange. Currency movement will take care of it, if needed. This will ease the money market. Stock market can get on with a bull rally. The businesses will make informed decision on borrowings. There will be truce between the banks’ treasury and ministry of finance’ debt office.

The policy guideline shows that SBP’s thinking is evolving. The committee was full of hawks prior to Covid. Now a pro-growth mindset is building. The SBP is keeping real rates negative for a reason. Any movement towards mildly positive rates will be gradual. The SBP expects this year inflation at 7-9 percent and medium term at 5-7 percent (consistent with pre-Covid policy stance). Based on these, interest rate hike (if any) in next 6-18 months would be 1-2 percent.

The message to the markets is that any base effect impact to make inflation in double digits in Apr-June quarter will not be the deciding factor. Any supply side shock due to domestic food prices will not excite hawks. The SBP will not come up with a policy response to a temporary surge in commodity prices due to global supply chain disruption.

The SBP is not strictly looking at the headline inflation in the short term. Core inflation is benign; but that is not the indicator SBP is relying on. The SBP is looking at the demand side inflationary pressures. It is looking at a combination of indicators to assess the overheating and decide accordingly.

Output gap is important. As long as it is negative, there are no demand side pressures to really excite hawks. Negative output gap means that economic capacity is higher than demand. Any surge in demand is to be absorbed by the excess capacity without putting pressure on prices. The output gap is negative for the third straight year. The median capacity utilization is still below FY18 levels. In simple words, the LSM index today is still not at the levels of 2018.

The second factor SBP is closely monitoring is wages to gauge any development of wage-price spiral. Historically, there were times when (relative to core inflation) wages were moving in tandem with non-perishable food. But not now. In past 18 months’ wages and non-perishable items are moving in opposite directions. Real wages are falling. There are no signs of wage-price spiral. The falling wages is one good reason to toe pro-growth policy.

The third element is inflationary expectations. Both business and consumer surveys are showing inflationary expectations; but fewer people and businesses think inflation will be higher in Dec/Jan versus Oct/Nov. Now with these three variables, any short-term inflation spike will not bother the committee members.