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SBP increased the policy rate by 1 percent to 17 percent seeing entrenched inflation expectations and sharp and steep growth in core inflation. The decision is in line with the street’s expectations. However, seeing the urgency in going to the IMF, some were thinking that SBP may be hawkish to counter the currency depreciation pressure emanating from the open market. That is not the case. Perhaps, SBP is not an active part of the ongoing round of negotiation with the IMF.

Having said that, there are no reasons to call a stop to the increase in interest rates. There is going to be at least one more round of tightening, if not more. Going back to the IMF is a must in the baseline scenario. There would be additional pressure on inflation due to energy prices adjustment and by making currency market-based.

And perhaps, SBP is waiting for the government to adjust on the fiscal and energy side in line with the IMF’s expectations, before leaving the currency market-based. By taking other measures, hedgers, and hoarders will get a strong signal on getting back to the IMF and that may result in the selling of dollars in the open market, and in that way, the depreciation in the interbank market may be tapered.

The inherent assumption in the monetary policy decision is that the government is going back to the IMF. If that does not happen, it would be an entirely different world for the monetary policy members, and future actions could be very different.

SBP is conveniently shifting the complete onus of IMF program resumption to the ministry of finance. Yes, energy and fiscal are the government’s issues. But, SBP is independent and powerful (on paper) and interest rates and exchange rates are totally in its preview. Yet, its signaling is tamed seeing the growing gap in the interbank and open market of the exchange rate. If the central bank thinks that the open market rate is not the real value, it could have raised rates higher to attract foreign currency buyers to convert to PKR. It could have averted the growing hoarding of commodities.

Well, there might be some wisdom in these half-measures. But timings demand strong signaling. And these are important to ease the inflation expectations pressure. Both consumers and producers are expecting higher inflation. Although the headline growth (month-on-month) is easing, the core pressure maintains.

The food inflation is keeping high. Here one of the problems is the lack of administrative controls and ill-timed decisions. Historically, numerous food commodities supplies and retail prices are controlled by provincial governments. Although it is not a good practice, poor decision-making in the past few months by provincial governments and their lack of coordination with the federal have worsened the food prices crisis. In a way, folks in SBP think that controlling food inflation and currency in the open market is the government’s job.

The core of the problem is fiscal. Without it, any policy action of SBP would have limited efficacy. The monetary policy noted that there are slippages in the fiscal year-to-date and the gaps are expected to grow in the remaining fiscal. The question is why SBP is not more hawkish to compensate for fiscal slackness. Perhaps, the hope is that the US treasury may influence IMF on relaxing fiscal targets this year. Yet, energy prices are to be increased and the currency must move. And to cater to the growth in inflation, SBP may increase the policy rate going forward. Broad thinking at SBP is right, but boldness is missing, as SBP is clearly behind the curve.


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Taimur Khan Jan 25, 2023 10:52pm
Where is the stock of government borrowings parked? In T bills! Will a rate of 7% cause inflation or a rate of 17% for existing debt? If sbp wants to curb government borrowing it can limit the size of psbr going forward rather than raise rates whixh are inherently inflationary goven our huge stock of debt to banks. It also limits insane profits by banks and encourages investment in industry whixh is the only way we can get out of the debt trap and the circular debt trap.
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