No let-up in monetary policy
It’s no surprise that the SBP (State Bank of Pakistan) left the benchmark interest rate unchanged at 13.25 per cent, an eight year high figure. Governor Raza Baqir had been dropping hints for a good couple of weeks that there would be no let-up in the (very) tight monetary policy. But his argument still seems to bank on the demand-side theory; that considering the unusually high inflation it is still necessary to keep money supply restricted. He’s not really responded to critics, as well as a very concerned business community, though, that seem convinced that the kind of inflation choking economic life in Pakistan at the moment is not demand-pull, but cost-push.
The proof, if any was still needed, lay in the fact that so many months of very high interest rate have not been able to control inflation at all. In fact, if you would just take a look at prices of edibles, which de-facto finance minister Hafeez Shaikh certainly didn’t till at least a few days ago, you’d understand that fact about as well as the common man struggling to buy food. Plus, there’s clearly no overheating of aggregate demand; not too much money, as the text book defines inflation, chasing too few goods. Quite to the contrary, everything is so expensive because excess taxation, especially in light of fast falling output, has raised input cost, many times, across the board. And that environment is only made worse by the recent rise in power prices.
All this begs a very important question. Since the high-interest rate approach hasn’t arrested prices yet, and nothing significantly different is going to happen over the next two months, is the SBP’s ‘independent’ governor still going to stick to his guns and keep the rate jacked up if price trends continue to disappoint him? Or will he finally accept that prices could well be off the scale because a harsh tax regime has been forced on low-, and increasingly non-, earning households? Put simply, anyone selling anything has simply priced that trend into his final prices. Perhaps then he’d be willing to gamble on the other argument; that stimulating investment and subsequently growth and employment could be a better antidote to chronic stagflation. And those, like many in the finance ministry, who thought the stock rally would now go on forever and any cheap money now would simply go to equities need only have seen two of the last three days for a timely reality check.
The prime minister sees things very differently, of course. He’s convinced that the economy has turned and inflation will now follow. He didn’t say more, though, except that inflation too was the previous government’s fault. Considering how these arguments have worked out in the last 15 months, it’s safe to assume that that things are likely to stay as they are.
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