Monetary Policy and the Economy | Editorial

Tomorrow the State Bank of Pakistan (SBP) will announce its new monetary policy and all eyes, especially in business circles, will be on Karachi and rightly so. So far, in order to ward off the worst effects of the coronavirus pandemic, the Bank has already slashed the policy rate by 625 basis points since this March. And, slowly but surely, this dovish stance has begun impacting the economy to the upside. Demand for credit is much improved, businesses are much happier than they were at the same time last year even though there was no coronavirus at that time, and significant sectors of the economy have started picking up.

Going forward, it is only natural for the business community to salivate at the prospect of yet another cut. And it’s not just expansion they are eyeing; for that would be a far off thing even though the economy has improved. One of the prime reasons is the losses some of them have suffered because of the virus and the lockdown. That has left many of them in need of cheap money. And if they can have some of that at a lower interest rate than at present they why not? At least that is how they would or should be thinking. Plus it’s not as if they are asking the central bank to do what monetary authorities in other countries aren’t already doing. The focus everywhere, for economic as well as political reasons, is on keeping businesses and jobs from collapsing any further, and every country’s central bank seems determined to do whatever is necessary to keep the damage to a minimum.

Then there is the other side of the picture; which represents that part of the market that is pricing in a rate hike. Their argument is that since the economy has picked up and things are better than before, why risk any further inflation especially after what everybody was made to go through before the pandemic and considering the way food inflation is hurting the middle and lower classes right now. But the food price hike owes to factors, as per the government’s own admission, to non-market factors like mafias that influence the end prices of commodities. So with overall inflation still looking to go down and the external position being stable for the time being, there should really be no reason to jack up the rate just yet.

Source: https://dailytimes.com.pk/668580/monetary-policy-and-the-economy/

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