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SBP Monetary Policy - Hike now, reap later
A 25 bps hike after 15 months of status quo is not a dampener
SBP's Monetary Policy - hike it now, don't kick the can
In the next SBP's meeting, it's imperative to restore confidence. PkR depreciation of 12% from the bottom - 2% from Sep 2020 - is playing with investors & business confidence. Such double digits swings are not keeping importers nor exporters happy. That said, managed float should stay.
Granted, a moderate hike in interest rate now would not curb the demand (except minor delta in consumer demand) nor address imports bill led by commodity inflation (Iron, LNG, Oil, Coal, Plastics, Cotton, Palm oil. Similarly, then there are "good imports" such as textile machinery, vaccines & strategic reserve. Correct, interest rate hike will not slow it down today.
What is needed is the change in the direction. After a 625 bps cut in interest rates, cycle needs to reverse sooner than later. A 25bps/625bps is not going to damage businesses per se but would only bring us step closed to the equilibrium. Such "gradual" & "measured" tightening is better for next 6 months instead of rapid 100-150 bps trigger. Feed into the expectations now.
Essentially, SBP has to act as a neutraliser. Give hope when covid was struck & give a reality-check when we're heading back for moderate growth. Russia, Brazil, Turkey, Chile, Peru & Sri Lanka are already reversing the monetary course. In some developed economies, the hike will come later, but stimuli is being rolled back.
What's more worrisome is that the inflation outlook has significantly worsened. Do not forget that Pakistan's economy couldn't sustain the last GFC's oil shock. This time too if oil prices were to flirt with $85-90 (IF), we are no position to handle the strain and might see further strain on hard-earned FX reserves and might require unscheduled monetary policy events. Government can only subsidise consumption (inflation) to an extent.
Yes, it was hardly a few months ago when we (including SBP) were celebrating the good Current Account Deficit and prioritizing growth. Even with a 600 bps (net of 25 bps hike), priorities still haven't changed. Slippages need to be addressed especially after August's import numbers. And message must be sent; to investors that we do react when necessary, to policy makers that SBP is independent and will react if export growth isn't enough.
The forward guidance should be absolutely clear about the plan. And must stand ready to take actions. The least MPC can do is to give absolute confidence to do "whatever it takes". Political pressure aside, it's time to use monetary tools as the first line of defence (flexible currency) needs support from the second line of defence. Kicking the can to November may only delay what's inevitable. 25 bps hike after 15 months of status quo would do more benefit than harm.