The spotlight is once again on the State Bank of Pakistan (SBP) as all of us speculate about Monday’s Monetary Policy Committee meeting.
Despite encouraging signs of progress following the February 8 General Elections and the Consumer Price Index (CPI) expected to drop in March, observers are eyeing a surprise from the central bank.
Recent economic indicators provide a mixed picture. While February’s CPI arrived at 23 percent, expectations for March suggest a big drop to around 20 percent as the base effect wears off. Brokerage firm Arif Habib Limited sees headline inflation taking a hike soon.
SBP looks more scared than confident, and rate cuts are unlikely.
This downward trend in inflation is thanks to the unnaturally stable Pakistani Rupee (PKR) against the US Dollar, which has held steady at Rs. 276-280/$ after Ishaq Dar’s departure as Finance Minister last year.
Meanwhile, the current account will probably stay in surplus for the remainder of the current fiscal year, buoyed by increased remittances during the Ramadan season.
So Rate Cut?
The new Finance Minister Muhammad Aurangzeb has hinted at an impending rate cut, citing the adverse impact of high interest costs on the federal budget and borrowers teetering on the edge of default. A modest reduction of 100 basis points would be a godsend for borrowers.
But the timing is tricky. The International Monetary Fund (IMF) is Islamabad these days, and the SBP may opt to tread cautiously to avoid jeopardizing negotiations. The central bank could opt for a prudent monetary tightening stance to appease the IMF, particularly in light of currency pressures in other emerging economies.
Economic analyst A H H Soomro told ProPakistani,
It seems like the choice is now how will IMF respond to a cut. Should we keep it tight and wait for the new program to get a pat on the back or show independence. There is a cushion for sure as CPI is likely to fall off from March and country’s debt cost needs a relief badly as nearly all tax revenues are used for interest payments.
Putting it bluntly: A drop to 21 percent would not impact inflation stability which hinges more on structural issues such as currency depreciation and energy sector inefficiencies than on monetary policy.
In this context, supporters of a rate cut urge the SBP to inject optimism into the economy by demonstrating confidence in the inflation outlook. A 100 bps cut would help address fiscal concerns and offer some breathing space for the real estate sector which has played dead since July 2022.
An unchanged stance won’t hurt anything but analyst confidence and give the IMF an idea that the central bank is playing it too paranoid and might prove to be a tough negotiator for Pakistan’s ongoing bailout review.
The decision on whether to act before the IMF is expected to bid farewell on the same day of MPC is a tough one for the State Bank. The regulator’s decision on Monday will tell us if the central bank is ready to be as independent as people think it is.
