| Welcome to Global Village Space

Thursday, February 15, 2024

SBP to hold rate as economy battles inflation and COVID

The policymakers, in the last statement, clearly indicated to keep rates on hold in the near term until there are clear signs that the economy is recovering, despite the signs that suggest otherwise.

The State Bank of Pakistan’s (SBP’s) Monetary Policy Committee is due to meet on Friday, the 19th of March to discuss the new monetary policy of the country. The authorities are expected to adopt a “wait and see approach”, with an emphasis on how the new positivity rate for COVID 7.1% impacts the business versus the inflation outlook in near future, writes AKD.

Read More: Food security in danger: Pakistan Economy Watch

It must be kept in mind that the price trends in March so far suggest an increase in Inflationary pressure in the economy, with the expected inflation to be around 9.78 percent higher than that of March 2020. Food inflation is rising with a 2.13% Month-on-Month (MoM) increase in the current month, compared to 0.81% MoM in February 2021.

This MoM increase can be attributed to a 13.6 percent increase in chicken prices this month compared to the last. The estimated increase in MoM prices for Eggs and Fresh Fruits in the markets is +14.6%MoM and 11.2%MoM, respectively, though both prices are in line with the seasonal trends observed in the past.

Moreover, the surging cotton prices along with the seasonal factors like shortage of cotton yarn have led to increases in readymade garments prices’ increase 6.4 percent Month-on-Month.

The key risk to the economic outlook in the medium-term is the impact of the policies proposed under the upcoming budget to tackle inflation.

However, according to the AKD analysts, the impact of demand on inflation is good and shows the purchasing power increasing in the society. However, the current core inflation for March 2021 is still expected to be around 7 percent compared to pre-COVID levels of 8 percent in February 2020.

After the plunging of the stock market for the last week owing to the senate elections, the market is expected to be stable as the government won both seats, Chairman Senate and Deputy Chairman Senate.

Further direction of the economy is hugely dependent on the potential IMF program finalization. However, the recent rise in T-bills and bond yields suggests investors are starting to anticipate a tightening of monetary policy sooner than anticipated to accommodate a potential-jump in inflation.

Thus, The State Bank of Pakistan (SBP) is likely to keep its policy rate on hold this week to continue to support an economy struggling with surging coronavirus cases and wary of increasing inflationary pressures.

Meanwhile, the Economic Advisory Group has tabled some concerns over the practicalities of autonomous SBP. According to EAG, even though all is rosy on the paper, there are practical implications. They agreed that inflation targeting is something that is happening globally, but it is unclear who in Pakistan will set the target and what should be the target number.

In the case of various factors, the Central Bank has to work with implicit inflation targeting regime, which is not fit for the country considering the lag in our economy. Change in interest rate may show the result in 6-8 months in Pakistan compared to 35 days in the US.

According to EAG, transparency, and accountability promised by the bill is a pipe dream in absence of a set target, as the parliament cannot hold SBP accountable for under or over-shooting a target that was not defined beforehand.

The EAG added that unless demand-side factors are not coupled with supply-side factors, ie, monetary policy is coupled with fiscal policy, the policy would not benefit anyone.

Read More: Government proposes a fully autonomous SBP

The group emphasized for government to work on the institutional coordination framework in this amendment to ensure transparency, accountability, and efficient implementation of policies.