SBP Responds to Questions Regarding Its Monetary Policy Decisions

The State Bank of Pakistan (SBP) has released a statement clarifying concerns from the past few weeks, where certain sections of the media, including op-eds, expressed concerns over its actions, particularly concerning monetary policy decisions and the role of the COVID-related monetary accommodation in fueling the currently elevated inflation outturns.

The Bank explained that certain op-eds referenced the monetary policy decisions in the earlier half of 2021 and implied that the Central Bank had absolved itself of its responsibility to combat inflation when it was rising. “Such points are all easier made in hindsight but let us remind ourselves what the situation was actually like back in May and July 2021.”

SBP explained how demand-side pressures appeared contained in the economy and price pressures were concentrated in a few items, wage growth was subdued, and inflation expectations were reasonably anchored. At that time, Pakistan was going through the 3rd and subsequently the more virulent and uncertain 4th Delta-variant wave of COVID-19. There were a few occasions when micro lockdowns were imposed while the vaccine rollout was not as extensive as it is currently.

In lieu of the pandemic situation during that time, the Monetary Policy Committee adopted a prudent policy stance by keeping interest rates unchanged, so as to not preemptively disrupt economic activity. It is quite easy, in hindsight, to criticize this decision even though no tangible alternatives were proposed in the op-eds or elsewhere at the time.

The Bank explained that in the midst of a once-in-a-century pandemic, it would be imprudent to solely superimpose classical economic theories onto data outturns. Policymakers, economists, and businesses around the world did not know how the global or domestic economy would evolve in response to mobility restrictions of varying stringencies in different locations. Similarly, there was, and in fact, continues to be, heightened uncertainty regarding price-setting behavior.

For instance, there is an ongoing debate in global policy circles and financial markets over whether the ongoing bout of inflation is transitory in nature or not. In the face of an unprecedented shock-like Covid, invoking supposed historical, textbook patterns of overheating, as in the op-ed, is facile. Under such circumstances, as policymakers around the world acknowledged, the costs of normalizing policies too soon outweigh those of waiting for more clarity on the path of inflation and output. As that uncertainty has recently waned in Pakistan, monetary policy is being appropriately normalized.

Moreover, the Central Bank remarked that during the pandemic, it would be imprudent to solely super-impose classical economic theories onto data outturns.  There was, and in fact, continues to be, heightened uncertainty regarding price-setting behavior. Under such circumstances, as policymakers around the world acknowledged, the costs of normalizing policies too soon outweigh those of waiting for more clarity on the path of inflation and output. As that uncertainty has recently waned in Pakistan, monetary policy is being appropriately normalized.

The State Bank of Pakistan reiterated that its policy stance is geared towards price stability while playing its due role in contributing to economic growth and development. Getting this balance right through the various stages following COVID-19 has been the key goal of monetary policy and helps explain the path of policy actions.



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