SBP has kept the policy rate unchanged at 22 percent despite the April inflation coming down to 18 percent. It appears that the decision is not driven by inflation, and it’s mainly the external account that is keeping hawks very much alive in the monetary policy committee. Since it is external account dominance, the decision perhaps is influenced by Washington DC.
The grapevine is that the SBP voting pattern in April 2024 remained largely unchanged at 8-2 where only 2 members voted for a rate cut. It is surprising that seeing falling inflation, no more members voted for the rate cut. It appears that the members were communicated subtly about the rationale of maintaining the status quo, which is to appease the lender of last resort. SBP (and fin-min) cannot be choosers.
The good news is that almost all the eight members who were for maintaining the status quo are convinced that there would be a rate cut in June. Now, perhaps 10 out of 10 members are thinking of a rate cut going forward. And perhaps, their influencers have similar thinking. Fingers crossed.
The other good news is that inflation is coming down and high real rates can help keep the demand suppressed. But at the same time, given very little room to cut federal fiscal expenditure in the short run, the OMO injections (note printing) would continue.
The situation today is the opposite of what it was in 2022. At that time, real rates were negative, and wealth was transferred from poor to rich. And today, with too high real rates (given almost zero growth and tight fiscal policy) it has an exact opposite impact.
Nonetheless, since SBP was late in monetary tightening when inflation was moving up, now SBP is doing a balancing act by keeping real rates high to ensure that inflation comes down and settles at low levels.
The banks may now ask for higher cut-offs in the treasury bills auction, as they are perhaps done with negative carry on their OMOs buying. The 3M bill is surely going to be north of 22 percent in the next auction to marginally increase the fiscal financing.
Anyway, there is some weight in remaining cautious given the slackness in both monetary and fiscal policies in the first half of 2022. Now in 2023-24, both policies are consistently tight, and that is yielding the result in terms of subdued current account deficit and stable currency. The international commodities – especially food - are also coming down, lowering the risks of the re-emergence of high inflation.
Thus, inflation is likely to remain low and the current account to remain manageable. The variable that is going to hurt is low growth, as barring agriculture (which is a rebound), everything else is either negative or growing at a snail’s pace from a low base. This trend is not likely to change any time soon. The interest rates may come down, but the rates are likely to be well in green in the foreseeable future.
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