Monetary Policy Statement with Touch of Assurance


By Syed Faran Rizvi

The SBP in its latest MPS maintained a status quo stance, where inflation was cited as central to the decision. The central bank also mentioned that further improvement is awaited in the macroeconomic environment, before a decision will be taken on whether to cut the policy rate from its current level of 13.25%. Overall, looking at the MPS, while the SBP has attempted to calm the nerves of the market, in our view (and we could be wrong), SBP did not deem necessary elaborating on the serious risks prevailing in the economy. However, it also needs to be mentioned that the SBP has now started a very commendable practice of holding Analyst Briefings after every MPS to address any questions.

  • In the latest Monetary Policy Statement (MPS), the central bank, rather unsurprisingly, announced to keep the policy rate unchanged at 13.25% for the next two months. Inflation (a word repeated no less than 12 times in this MPS) was cited as central to the decision to maintain a status quo stance (mentioned in the very first paragraph). Whereas, towards the end of the MPS, ‘fiscal slippages’ (perhaps the committee meant any further fiscal slippages) and a ‘faster-than-expected’ slowdown in aggregate demand were mentioned as key upside and downside risks, respectively. And balancing these two risks remains at the very heart of the matter. Unfortunately, the uncertainty continues to linger over the economic outlook. Undoubtedly, in order to achieve the target inflation of 5-7% over the next 24 months, maintaining a status quo stance was necessary, as per the MPS. Keep in mind that over a dozen central banks have cumulatively chopped off over 1,000bps in their recent monetary policies, the latest being Turkey and Vietnam. Despite the obvious importance of inflation, we would really appreciate if the SBP could arrange a separate session for the analyst community on this topic sooner rather than later, particularly when the rebasing is a red hot issue. Granted, the inflation mechanism does not fall under the SBP’s ambit, but we tend to place our faith in the central bank when it comes to providing timely data and information. Some light could hopefully be shed on the recent changes in weights in the new CPI, such as the interesting increase in weight for restaurants and hotels category.
  • Interestingly, the SBP has maintained its GDP forecast at 3.5% for FY20. This, along with keeping the inflation forecast at 11-12% definitely makes the case for keeping a status quo stance on interest rates at current high levels!
  • Another point to note is that on the fiscal sector, the MPS seemed nonchalant, stating that recent developments on the fiscal front had been ‘mixed’. Moreover, there was no mention of the high levels of debt accumulation of late and its impact on the fiscal deficit in the MPS. However, we understand that given where the economy stands at present, there is no other viable option than to raise additional debt.
  • As far as the external account is concerned, the central bank as usual commented favourably on the declining current account deficit (CAD). Given the higher interest rates, economic slowdown and the missing economic framework thus far, there was always going to be a reduction in CAD and particularly from the high and unsustainable levels in recent history. We repeat yet again, that what should be even more relevant from the market’s perspective right now is what happens in the financial account.

 Let’s put it this way – things have not been too bright in the global scenario either. The current economic slowdown, the US-China trade war, US-Afghanistan Taliban talks (or lack of), our own Kashmir issue, Middle East tensions and concerns regarding Brexit are some of the issues that have been causing jitters besides just the Fed rate cut. Even the latter is a function of concerns on the global front rather than any serious worries in the US economy itself, a point that should be evident from the 10-Yr US Treasury yield shrink to record lows of late. In our view, the global economic headwinds dominating at the moment might make raising money in global markets all the more difficult for Pakistan. Let’s keep our fingers crossed that none of these event risks materialize, since the potential ramifications might be pretty unpleasant. A case-in-point is what happened to oil prices over the previous weekend after tensions in the Middle East.

 As far as local markets are concerned, on one side, people seem to be chasing higher yields (not abnormal market behaviour in the current environment), which have caused longer tenor yields to fall below shorter tenor. Simultaneously, there are those who have been worrying about hot money exiting the country, when in reality, inflows have only started at this point. This is why the SBP Governor’s recent speech at the 16th Annual Excellence Awards Ceremony by CFA Society Pakistan needs to be lauded as he effectively addressed these concerns.

 Overall, looking at the MPS, while the SBP has attempted to calm the nerves of the market, in our view (and we could be wrong), SBP did not deem necessary elaborating on the serious risks prevailing in the economy. However, it also needs to be mentioned that the SBP has now started a very commendable practice of holding Analyst Briefings after every MPS to address any questions.

 Finally, the most insightful quote from the MPS, in our view, which require special mention, is pasted below:

“The MPC noted that fiscal prudence and meeting the program targets is essential to sustaining the improvement in macroeconomic stability.

About Author:- Mr. Syed Faran Rizvi is visiting fellow at IPI.

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