As most things in Pakistan these days, reactions to the monetary policy announcement are bordering on two extremes. The disappointed camp obviously wanted nothing short of a 300-500 bps rate cut, citing the recent wave of decisions by central banks around the world since the coronavirus outbreak, and the resultant sharp decline at the bourses.
The disappointed lot belongs to a wide variety of segments – from stockbrokers to big corporates, from business and trade associations to news anchors, and from economists to news anchors turned economists. The extreme bitterness after the MPS announcement can be put down to vested political and business interests in some cases, and political leanings in other.
The other camp had it much closer, having anticipated a rate cut of 50-100 bps in the runup to the policy announcement. The reasoning was apparently built on more realistic grounds and on SBP’s recent treatment of macroeconomic variables. Justifications offered by analyst community – who called it right - were once again found closer to economic rationale.
That the analysts got it right is actually a good reason why the 75bps cut is problematic and has invited more criticism than most times. Economic rationale is valid under most circumstances. But the world today is anything but rational.
This is not just a year of bad crop, an over or undervalued currency, few supply chain disruptions, tensions at the border, a volatile oil market, or floods. The pandemic is bigger than all these combined. This is once in a lifetime event playing out right in front of the world. These are anything but rational times. Why, then, a rate cut, which sounds and appears to be based on very solid grounds – looks out of place?
Granted, there will be explanations to every bit of criticism with a heavy bookish dose of NDAs and NFAs, and that how the gradual buildup of reserve holds more importance than caving in, to the populist demand. There will be countless reminders why the hard yards made on the external front, should not be let go off, just because there is a pandemic out there. Or the fact that most central banks are still running positive real interest rates, and that the differential with the world has generally thinned – as major economies went for no more than 50 bps reduction in their latest policy actions.
This is not to say that the SBP should have cut more than it did. But did it even give a thought beyond going the stated policies of moving in a select band of target inflation? Was there any consideration that a fiscal stimulus may soon be needed in a country which does not have much fiscal space? Did much thought go into potential savings on domestic debt servicing as a result of a bigger cut? Could a few hundred billion rupees not be freed up for the government to support the bottom income quintiles in the trying times to come? Is this black swan not black enough for the MPC to see beyond the IMF-defined primary deficits?
There is solace in the fact that the SBP can convene an emergency meeting anytime it deems fit to reconsider or prepone the next MPS. Or maybe the prevailing interest rates will deter all the upcoming “massive demand driven” inflation.