Policy rate: a cut is likely?

Despite a decline in inflation, overall costs are still growing this year in comparison to prior years.

Regarding inflation, let me remind everyone that core inflation is not the benchmark used by central banks, taking into consideration the remarks made by a SBP Governor, now a former Governor, Reza Baqir. He believed that every economist has a unique perspective. According to him, headline inflation is used by 95% of Central Banks worldwide to target inflation. Furthermore, as it leaves out almost half of the CPI basket, this is not exclusive to SBP.

He probably said this since around 90% of our economy is undocumented. A tax-to-GDP ratio of less than 10% will strengthen his argument.

Regarding inflation, a reduction in inflation is anticipated because of the base rate effect. It is an economic ploy in actuality.

Apart from geopolitical uncertainty, rising cost of oil on the international market could eventually affect our economy and drive up the prices of energy, which will ultimately affect consumers. This is another reason why inflation is still projected very high.

Additionally, the prices of food items rise significantly during Ramazan and Eid-ul-Azha.

It consequently has a direct impact on living expenses since it rises in line with consumption. Obviously, the inflation rate is based on a basket of goods. About 37% of the food groups in the CPI basket are made up of it. A greater portion of cash is spent on food, which drives up personal inflation.

A large drop in prices and inflation in the months that follow cannot be predicted by a decrease in February’s inflation rate.

Given the current trend, it is expected that prices would rise, albeit more slowly.

What is the market expecting? Will the expenses return to what they were about 5 or 6 years ago? Not at all. At that time, the value of the Pakistani Rupee in US dollars was 125; it is now 279.

During this period the amount of debt, both foreign and domestic, has more than tripled. Circulation Currency (CiC) has doubled. Over this time, the prices of durable goods, such as smartphones, vehicles, and other gadgets have more than doubled.

The cost of petrol, gas and electricity has soared by more than three times. Furthermore, based on PKR/$ parity five years prior, revenue collection was $31 billion.

The SBP open market operation (OMO) injection’s size has increased by about four times in the last five years. Unbelievably, little money is lent by banks to the private sector which is about 45 % of Advance to Deposit ratio. This has to be looked into by those who determine fiscal and monetary policies.

Furthermore, if the policy rate is reduced by 500 or 100 basis points, what would happen? Borrowers will receive some reprieve. Or if the rate remains unchanged, borrowers will have to bear the burden.

However, bank purchases of government securities have left no liquidity available for bank lending. This method will be followed until the tax objectives are easily implemented.

We have to come out of our hiding place and act morally. We have to realise that the road ahead is permanently blocked and we have no choice.

By the end of the current fiscal year, inflation won’t fall below 24%. As a result, the SBP policy rate will not be reduced in the calendar year by 500–700 basis points as projected by many in the past.

Even if I do not anticipate a reduction in the policy rate on Monday, the MPC may still decide to make a small rate decrease of 100 basis points if brave ones are blessed.

Copyright Business Recorder, 2024