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Since the beginning of current financial year, the State Bank of Pakistan has maintained the benchmark interest rate at 22 percent. In the three meetings of Monetary Policy Committee (MPC) over the past five months, SBP has reposed confidence that its policy stance is appropriate, based on forward-looking expectations of headline inflation maintaining a downward trend throughout the fiscal year.

In fact, in its July meeting, the MPC projected an “average inflation in the range of 20 – 22 percent in FY24”, in line with the 21 percent inflation rate used by the federal government in preparation of its annual budget estimates. But is the inflation target achievable?

During the first five months (Jul – Nov 2023) of the current fiscal year, inflation rate has averaged at 28.6 percent, compared to period average of 25.1 percent during the preceding fiscal year (Jul – Nov 2022). The central bank insists that the annual inflation would fall dramatically in the later half of the fiscal year, once the elevated base effect from Jan – Jun 2023 kicks in.

But the central bank’s optimist forecast ignores that on month-on-month basis, the headline CPI has been rising at an average rate of 2.2 percent during 5M-FY24, which is at par with the average month-on-month inflation rate during 5M-FY23. This in turn has brought the year-on-year average rate close to 29 percent during the Jul – Nov 2023 period, despite an already elevated base effect from the same period last year.

Now, in order for the average inflation to decline to the target of 21 percent for the full year, month-on-month inflation rate will in fact have to turn negative for the remainder seven months of the financial year, recording a period average of -0.5 percent from Dec 2023 to June 2024. For context, the period average month-on-month rate during the same period last year was 2.15 percent. In fact, based on available data, month-on-month period average rate for Dec – Jun has not once been negative, at least not since FY18 (based on new CPI base 2015-16).

Even under a best-case scenario where month-on-month average during Dec – Jun falls to 1 percent (from the current 2.2 percent during 5M-FY24), average annual inflation reading would come in at 25 percent, four percentage points above the target rate. This in turn means that the policy rate will have been negative all of FY24.

Yet, positive market sentiments over the past few weeks seems to indicate that the days of monetary tightening should now be behind us, and a rate cut is now overdue. This market sentiment has in part been fueled by the administrative state action against speculation in the currency market, timely completion of IMF review, and, lastly, what could only be termed positive ‘vibes’ of planned FDI from the Gulf countries. What the merchants of exaggerated optimism fail to spell out, however, is that a premature rate cut would be pushing Pakistan into a monetary expansion cycle long before advanced economies do so, which would raise pressure on the exchange rate to let off the steam from rising inflation differential.

It has been over three years since the central bank brought down the benchmark interest rates into negative territory back in June 2020. Ever since, the Monetary Policy Committee (MPC) has met 25 times, averaging a meeting every 45 days. During this period, the policy rate has been raised by 15 percentage points. Each time, the central bank assures the market participants that the real rate is now positive on forward looking basis. Yet, the real rate has consistently remained negative throughout this period.

The central bank has fallen short of fulfilling its primary mandate of inflation targeting since the beginning of the pandemic. However, the extraordinary times are now over, at least for the rest of the world. Covid is behind us; as are the supply chain disruptions, commodity super cycle, spillover from Russian invasion of Ukraine, monsoon floods of 2022, and the risks of immediate debt restructuring for Pakistan’s economy. Global energy prices have also remained resilient in the face of conflict in the Gulf. The central bank will have little excuse, if any, to fail to meet its inflation target yet again in FY24. And maintaining – or worse, amplifying negative real rates – will only serve as a death nail in the coffin of SBP’s medium term target of 5 – 7 percent over the coming years.

Beware!

Comments

200 characters
Aamir Dec 05, 2023 09:47am
No need to cut discount rate till inflation is tamed. Any premature move can unbalance everything
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KU Dec 05, 2023 10:53am
Too much and needless nuisance value is given to SBP, they are only the chief whip of sorts. The responsible at the top must come up with a reasonable economic recovery plan to revive the industry and agriculture. There is no alternative and we will keep reading about our woes well into the next few years.
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Kes Dec 05, 2023 11:58am
SBP has got its head stuck in the sand with these fancy inflation charts to make themselves look pretty. When we all know that the rate is dictated by: a: the risks associated with the current econo-political environment. b: the quantum of borrowing required by the government. The reduce the interest rates, the powers to be need to be serious in creating a long term stabilisation program for the country to reduce the risk. This will automatically reduce the risk and in turn the interest rates. Once the rate drops to a sustainable level, borrow maximum available to rebuild and develop for the future. The key words are "Sustainable" "Rebuild" "Future Development".....
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Az_Iz Dec 05, 2023 05:42pm
Savings by individuals can also be a tool to bring down inflation, as well as build personal wealth. Pakistanis consistently over the years have much lower savings rate compared to others at every stage of development. A low income country will not become rich by import and consume model of economic growth.
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Abrar Ahmed Dec 05, 2023 06:11pm
I am shockingly amazed by SBP's stance on policy rate as well as the relevance of comments on the article. May I add to everyone's knowledge, that Policy rate in Pakistan is driven by the unified mafia of SBP itself, commercial banks and Ministry of finance. SBP Clowns led by Mr Jamil (no one else, more incompetent was available) and an outdated ignorant 50's model Begum sahiba as Finance Minister don't want to comprehend anything. The savings farce can be best understood by visiting any National Savings Center.
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Allauddin Dec 05, 2023 07:10pm
@Abrar Ahmed, 50's model thinks she's the beauty with brains. Forget about beauty, she's the most idiotic person on earth.
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Babar, New York Dec 05, 2023 07:51pm
When you have an uglier and dinosaurs aged female version of Dar as finance minister, what else do you expect?
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Usman Dec 06, 2023 06:50am
@Babar, New York , so did she create herslef that you called her uglier.Stop being so personal.she has the potential and she dhas done better than finance ministers from time.of niyzai zardaia nd sharif.
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DonkeyBegum Dec 06, 2023 12:03pm
@Usman, being ugly isn't her fault, but being stupid is definitely her fault.
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Actual Truth Dec 06, 2023 05:41pm
@Usman, First thing first, I dont think it is okay to comment on anyones appearance but Please do tell what has she done better than pervious finance ministers. In fact she has done nothing, following every action item dictated by IMF line by line is not doing something, this could have been carried out by our babus in Finance division even without her.
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Irfan Dec 06, 2023 06:23pm
Stock market 's performance and USD rate cut are certainly positive indicators.
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Javed Naqvi Dec 06, 2023 07:54pm
Pakistan is a land of youngsters. We have old, brain dead and fugly people like Begum and Baloch making decisions and representing us.
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Kashif ALI Dec 07, 2023 02:33am
It is quite disgusting to see few brainless idiots (commentators above) talking stupid about Finance minister, who is one of the most competent finance professional. All these Idiot commentators must have suffered from Brain-eating amoeba. An evident proof that they are the worst form of illiterate, jaahil people ever to comment upon economy in a professional manner. They must be just dismissed from such discussion!!!!
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Javed Dec 07, 2023 07:46am
When will learn to be honest , the corner stone of Islam is truthfulness, we are anything but. It is a very long haul to get out of the self created mess of the last half a century, exploding population, corrupt governments , poor to nonexistent education and health care , disregard of merit , an army which has conquered their own country and rapacious and self serving elite and leadership, no one is even willing to address this so gimmickry is the order of the day.
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Kashif ALI Dec 07, 2023 03:20pm
Stop talking trash about my mum. She's given birth to fifteen children, this has taken a toll on her body and mind.
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