Given a more stable currency, positive 12-month forward real interest rates, lower global oil prices, a successful IMF program review, and the expectation that inflation will taper off in the upcoming months, its stance may seem hawkish and a case of once bitten, twice shy. Meanwhile, a rate reduction is justified by the weak growth.Others counter that reserves are declining due to a decline in foreign official and private inflows, headline and core inflation readings are still high, and exchange rate stability is still precarious.
Therefore, a move to monetary easing at this time could potentially lead to a spike in imports due to pent-up demand and the rapid depletion of lead reserves, which are barely sufficient to cover imports for two months. This could hinder attempts to control prices by depressing the currency rate and increasing the current account deficit.
Furthermore, given the monthly inflation data, real interest rates continue to be negative, whereas those of Pakistan’s trading partners are positive. It is therefore not justified to lower the rate at this time.In the recent past, the SBP has frequently predicted inflation incorrectly. It is admirable that, for once, efforts are being made to anticipate market trends in order to attain medium-term price stability, with a target of 5-7 percent CPI inflation by the end of June 2025.
Since the MPC states that the recent increase in gas prices “may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce,” the SBP is undoubtedly adopting a cautious approach in keeping the interest rate at its all-time high of 22 percent.
With core inflation at 21.5 percent, barely down from its May peak of 22.7 percent, and headline inflation jumping to 29.2 percent in November from 26.9 percent the month before, the MPC acknowledges that the actual impact of the administered gas prices is “relatively higher than [its] earlier expectation.”
When the few gains from a tighter stance could be wiped out by unknown risks to inflation, how can SBP go back to monetary easing and maintain price stability? Rates need to decrease, but they should do so gradually as inflation starts to decline and foreign exchange reserves start to increase. Making snap decisions could put us in more danger. Right now, the most important thing we need is a little patience.
