If you could ever use “unprecedented” without a sense of hyperbole – it is today. It is well and truly the season of highest-evers, lowest since, and worse still, the end is not in sight yet. Unprecedented it may be, but unexpected it is not. The central bank’s decision to hike the policy rate by a further 300 basis points is well clear of the street consensus.
More than the 50-year high CPI reading, it could well be yesterday’s sharp rupee depreciation versus the greenback that proved the difference between an expected 200 bps rise and the actual 300 bps increase. Expect industrial activity to take a sharp correction, and FY23 could well end with the LSM deep in red. The central bank recognizes the trade off, reiterating the “short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched”.
Given how core inflation is touching 20 percent and is broad based, there is nothing transitory about the trend of the last 8-10 months. While there may not be a book standard definition of what qualifies as entrenched inflation – it will be in the best national interest if the central bank communicates at what point does it see inflation beginning to look entrenched.
The central bank has raised the year-end average FY23 inflation expectations to 27-29 percent – up from 21-23 percent in November 2022. That translates into 30-38 percent inflation for each of the remaining four months of the fiscal year. And given the upcoming energy price reforms, and the second round of inflation that will follow –30 percent average inflation for FY23 is staring right in the eye.
Interestingly enough, the MPS brings back the talk of forward-looking real interest rates for the first time since April 2022. The committee sees the policy action has “pushed the real interest rate in positive territory on a forward-looking basis”. Positive real interest rate is music to the IMF’s ears is an open secret and that Pakistan is doing all it can to appease the Fund is another one.
Defined as the “policy rate less expected inflation” one wonders if the goal post has shifted to core inflation once again.Or does the bank sees inflation to come down abruptly under 20 percent, while also expecting it to remain well ahead of 30 percent for the remaining year? Once again, clearer communication can do wonders and manage and anchor inflation expectations better.
Talking of communication, the policy statement was short and crisp – cut down to more than half from the usual monetary policy communication in recent times. Last time the MPS was this short was in April 2022 – and back then, the rates were revised up by 250 basis points. This may actually be a sign of effective communication and nothing else. But in times of such gloom, a light-hearted viewpoint can bring a chuckle or two. Or if you want to laugh harder, look no further than the Finance Minister’s tweet yesterday which ended with “all economic indicators are slowly moving in the right direction”.
Comments
Comments are closed.