KARACHI: With regard to the editorial in Business Recorder dated November 22, 2021 titled “Monetary Policy Statement”, the State Bank of Pakistan would like to clarify some of the points raised.
First, the editorial appears to opine that the Monetary Policy Committee’s decision to raise interest rates by 150 basis points was higher than the market’s perception of a “75-100 bps” increase. In this regard, the SBP would like to refer to a BR report dated November 17, 2021, titled “MPC to meet ahead of schedule: 100-200bps hike in policy rate expected”. In addition to the headline, the report points out that “the committee is expected to further tighten the monetary policy due to rising inflationary pressure on the economy and higher current account deficit. The market is expecting an increase of 100 to 200 basis points in the key policy rate in its rescheduled meeting to be held on Friday.” In another report, dated November 19, 2021, the BR pointed out that “the secondary market yields in the money market have already moved up by 100-125 bps over the last policy rate change and any change in the policy rate (up to 100-125 bps) is already priced in”. As such, the decision to raise the policy rate by 150 bps was not as far out of line with the market’s expectations as the article implies.
Second, the editorial seems to associate the reference to monetary policy normalization by the MPC with supposed commitments with the IMF. Here, it is worth noting that the SBP, like many central banks across the advanced and developing economies, has kept real interest rates in negative territory for a prolonged period after the Covid-19 outbreak. This policy stance was quite necessary and eventually proved crucial in the economic rebound witnessed from the start of FY21. At the same time, such an accommodative stance and negative real interest rates were going to be eventually phased out. In the January 2021 MPS, the SBP had implicitly referred to the reversal of the accommodative policy stance “as the recovery becomes more durable and the economy returns to full capacity”. This was then made much more prominent in the September 2021 MPS, which noted that “the priority of monetary policy also needed to gradually pivot from catalyzing the recovery after the Covid shock toward sustaining it” by “gradually tapering the significant monetary stimulus provided over the last 18 months”. Subsequently, with growth prospects continuing to improve and risks rotating towards inflation and the current account somewhat quicker than anticipated, it was appropriate for this reversal to be accelerated.
Third, the editorial points out that “…critics of the monetary policy decisions during the ongoing International Monetary Fund (IMF) program have consistently accused the SBP and the MPC of following the Fund’s dictates without providing an appropriate in-house context (including the fact that before May 2019 the discount rate was linked to core inflation as opposed to the Consumer Price Index).” Here, it is important to note that while the SBP has always analyzed trends in core inflation, it has never explicitly stated in any of its monetary policy statements or the State of the Economy Reports, that it sets the policy rate based solely on the trends in core inflation. Though, a high core inflation is always a source of concern for the central bank. The November 2021 MPS also notes that “core inflation has also picked up in the last two months, rising to 6.7 percent (y/y) in both urban and rural areas on the back of house rents, cloth and garments, medicines, footwear, and other components”. Importantly, core inflation is one of the indicators to gauge the underlying inflationary pressures. Note that the inflation target announced by the government corresponds to the National CPI inflation which is currently set at 5-7 percent, to be achieved over the medium-term.
Copyright Business Recorder, 2021
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