The monetary policy committee minutes are released and surprisingly, seeing the external vulnerabilities which were at peak in September, one member voted for 15 bps cut. While the other eight members were all for keeping interest rates at 5.75 percent. There was no hawk in the room and no one sees external imbalances enough of a reason to tighten the screws a bit. Does that imply Dar is still running the show?

Seemingly, the decision making is influenced a lot by the Forecasting and Policy Analysis System (FPAS) of the SBP which is still implying that there is some room for rate cut. Even if any member had opted for rate hike, that would have been clouded by SBP’s model forecast.

The State of the Economy Report for 1HFY17 published in Feb17, projected Jul16-Jun17 CAD ranging from 1-2 percent of GDP. How can a sophisticated model based assumptions have such a huge range for 12 months numbers when six months have already passed? Why can’t it be more precise?

Secondly, and more importantly, how can the SBP, with all the information of the economy amid equipped with latest tools and seasoned battery of research staff, be so wavered in projecting mere 4-6 months of current account numbers?

The CAD was already $3.5 billion (1.2% of GDP) in first half, how can the SBP forecast expect current account to remain so subdued in the second half? Anyhow, the 1HFY17 CAD was revised up, after adjusting for CPEC related imports, to $4.7 billion (1.5% of GDP) while the second half was lethal as the CAD stood at $7.8 billion (2.6% of GDP). The full year actual number came at $12.4 billion i.e. 4.1 percent of GDP against the SBP forecast of 1-2 percent of GDP.

Mind you, there is no external pricing shock. The only room can be given to SBP is for the absence of $700 in CSF, while the rest should have been explained by the model. Similarly, the fiscal deficit was forecasted in the range of 4-5 percent while the actual number was 5.8 percent.

One may wonder with such variation in SBP model’s forecast from the reality, how can the monetary policy decision, ever reflect reality.

The benefit of continued easing has been visible from upbeat private sector credit and 5 percent plus GDP growth, especially handsome LSM growth. The Large Scale Manufacturing is surprising many as not only FY17 numbers at 5.6 percent were higher than provisional growth of 4.9 percent, but the momentum continues in FY18 as LSM grew by whopping 8.35 percent in 1QFY18.

The equation is simple, higher the growth, higher the import bill, and in turn higher is the current account deficit. The monetary policy decision making has to take this reality into the equation. The fiscal deficit is ought to grow in the election year as well and the reliance of financing is falling on the central bank which is inflationary in nature. The MPC has to have a close look on the fiscal side as well. Higher CAD is also challenging exchange rate stability; any depreciation in currency can have a spiral impact on inflation.

Thus, the rising twin deficit can result in high inflation eventually. Anyhow, seeing the depressed food inflation owing to supply glut, the inflation is low so far and FPAS model based headline inflation forecast is revised down to 4.6 percent from 5.0 percent reported in last MPC. Do we need to say more on the accuracy of FPAS?