An interest rate cut? Not yet but almost there!

October 28, 2023 (MLN): The Monetary Policy Committee of the State Bank of Pakistan (SBP) is scheduled to meet on Monday to decide the next monetary policy rate. In the previous meeting, the bank surprised everyone (except for your author) by keeping rates steady despite heavy calls for a rate hike.

That's done and dusted. Let's see what has changed since the last monetary policy on September 14th. 

Firstly, T-bill auction rates are down 200 bps. Secondly, the Current Account deficit is in near balance. Thirdly, PkR has strengthened from 295/USD to 275/USD.

Fourthly, fuel prices are being cut. Fifthly, imports are gradually being honoured along with dividend repatriation. Sixth, Oil is down from USD 94 to USD 88. These events do cause material improvement in the inflation outlook but risks remain. 

It's premature to be overly confident and call for a dovish stance 1.5 months after the market wanted a hike. Today, the market wants a cut. Don't pay heed to such irrational extreme exuberance. Going moderate is the way forward.

Stream of rate cuts could start with cuts in alternative monetary policy (every 3 months). Or cuts in successive meetings. But the stance shouldn't aggressively change. 

Right now, the IMF's review is around the corner. Geo-political risks remain excessive after the Israel-Gaza conflict. Indeed, the government would be the prime beneficiary of a rate cut today but Rupee has just started to stabilize. Give inflation another 6 weeks to moderate its pace from the high 20s. 

One year forward real interest rates should be positive already. A premature cut could derail short-lived macroeconomic decorum.

The boat has steadied - rate cut (though welcome) can wait till December. The forward guidance will be of enormous importance. Tell people that good news is coming and to remain patient.

The hawks are gone, Doves are on their way.

The author is an independent economic analyst and writes on Twitter and Linkedin.