The central bank has finally announced the date to release the pending monetary policy: its coming this Tuesday. As this date is just a week before entering into a new IMF programme, there are some who are speculating that the MPS decision may be influenced by the fund.
The analyst community, however, is by and large tilted towards status quo. In a recent survey conducted by BR Research, all of the 13 respondents said they did not expect any change in discount rate, on the premise that higher inflation numbers in July were due to the Ramzan effect. Majority of them expect monetary hawks to dominate at the helm of central bank later this year, owing to rebound in inflation primarily due to tariff rationalization.
Its a 50-50 on rate hike or no change now. But, going forward, monetary tightening is inevitable. Given the inelasticity of private credit to interest rates movement, any increase in discount rate would harm the government and benefit the banks. Mind you, despite the 500 basis points decline in interest rates in the last two years, private credit remained in the red zone last fiscal year.
With the policy rate staying at 9 percent, real interest rates are still in positive territory as the inflation is fiddling around 8 percent. Latest weekly sensitive price index suggests that CPI in August may remain below 9 percent. So, there is a good reason for central bank to adopt a wait-and-see approach. Plus, the inflation is triggered by cost push factor while there is no substantial demand pull factor to increase prices.
With massive government borrowing (Rs611 billion) from the central bank in the first five weeks of this fiscal year, some economic demand ought to be created going forward. However, there is no immediate need to curb it.
In addition, the current account was marginally in surplus in July, which gives more credence to the view that the SBP need not be hawkish right now. But the overall balance-of-payment is down by $820 millions, which warrants some attention from the doves to change their mind in coming policy reviews.
The most important factor for the central bank to assume its tightening stance in the future is based on the inflationary impact of massive upward revision in electricity and gas tariffs. This impact is surely going to be on CPI before the next policy review in two months.
By then, the fund programme would have started and we already know that the IMF is always keen on tightening the monetary stance to put brakes on the fall in reserves and discourage government borrowing from the banking system. Some analysts expect inflation to reach 11 percent by the end of this year, so 150-200 basis points increase in policy rate this year is imminent.
If the ongoing political tension in the Middle East worsens, oil prices might move northward in the short term. If that happens, it would be a double whammy for Pakistan as it is not only going to fuel inflation but also put strain on the current account.
Meanwhile, the law-and-order situation is anything but deteriorating; hence, foreign direct investment is going to remain elusive. Though the worst is over for forex reserves, the elusiveness of FDI coupled with slowing pace of growth in remittances may mean that foreign reserves will remain tested. The only respite on this front is the IMF and inflows from other multilateral agencies.
The bottom line rests with government officials dominating the board of central bank, for they may push the status quo on Tuesday to ease the fiscal deficit. But, their influence is going to fade with IMF coming up with its stick and with inflation dragon out in the future. Hence, hawks are going to dominate most of this year.
Comments
Comments are closed.