As expected, SBP kept the policy rate unchanged. SBP took a pause. The monetary policy is expected to remain data driven. In sync with global central banks’ focus which is slightly shifting from inflation to growth, SBP is showing a subtle shift from its tightening stance. The method it applied – combination of 800 bps increase, administrative control on imports L/Cs, exchange rate movement, along with fiscal energy pricing adjustments is warranting a pause. And if the global commodity prices continue their direction of tapering off, there is no reason this pause could end with a decline in rates.
The key determinants are inflation and current account deficit. The current account is likely to be controlled through administrative measures and fall in commodity prices. There are signs of genuine demand tapering off, but bigger fall in numbers (for auto and all) is due to control on imports. SBP expects the transmission of 800 bps increase to take place in the next few months and is planning to end these supply side disruptions.
However, there would be a risk of pent-up demand as soon as the restrictions are opened. SBP perhaps would slowly release the lever and would like the number to remain lower than last year. This policy is fine under the circumstances. The fiscal prudence needs to be utmost important. With expected fall in taxes due to lower imports, new taxes are to be imposed. That would play its role in tapering the demand by shaving off the disposable income.
Then the SBP expects government to impose energy conservation measures, and here the private sector and households need to contribute as well. All these are important for the economic recovery. SBP is beginning with having two days work from home rule. It should have this applied on the banks. Corporate sector should volunteer too. And government should put its foot down on closing the commercial activates and businesses earlier.
It seems SBP and MoF will keep a close eye on the current account balance and would take combination of administrative measures to keep it tamed. The demand of foreign currency in the interbank market may remain in control. This with expected less than anticipated developed world tightening, will keep the currency depreciation in check. Better political environment can let it appreciate a bit. Seeing better external and fiscal balances, the tightening cycle should end here.
However, SBP expectation of growth of 3-4 percent is optimistic. The controls, monetary and fiscal transmission along with floods would likely to keep the growth lower at 1-3 percent.
The other and important question is inflation. SBP expect it to be at 18-20 percent. Last month it was 25 percent. This month it is expected to be 28 percent. SPI is already in 40s. Core is moving up too. That doesn’t mean that the monetary policy is accommodating. Inflation is high due to delay in passing of energy pricing at peaking rates. The inflation rate would have been staggered. Anyways, the second half of the fiscal would be under 20s and could be in single digit (assuming no further shock) in the first half of the next fiscal. By September, the real rates are expected to be in balance on expected 12M forward looking basis.
Seeing all the factors, it is a right decision by SBP to take a pause.
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