Govt ready to hike policy rate further if price pressures reemerge

January 22, 2024 (MLN): The government has assured the International Monetary Fund (IMF) to respond resolutely if near-term price pressures reemerge, including due to stronger-than-expected second-round effects on core inflation, or if pressures on the exchange rate reemerge amid the normalization in the current account.

The first review report under the Standby Arrangement published by the global lender revealed.

The government said that its goal is to ensure that inflation and inflation expectations are on a clear downward path, with the exact pace of future adjustments dependent on inflation data, exchange rate developments, the strength of the external position, and the fiscal-monetary policy mix.

To this end, it will aim to ensure that the real policy rate remains in clear positive territory on a forward-looking basis to signal our commitment to bring inflation within the target band within FY26.

To strengthen monetary policy transmission, the interest rate on the two major refinancing schemes (EFS and LTFF) will continue to be linked to the policy rate with a spread of no more than 3 percentage points.

The IMF in the report highlighted that a tight monetary stance is critical to reduce inflation, re-anchor expectations, and support external sector rebalancing through the exchange rate.

While staff sees the stance as broadly appropriate at the current juncture given weak domestic demand, the MPC should stand ready to respond resolutely if near-term price pressures reemerge, including due to second-round effects, and ensure that the real policy rate remains in clear positive territory, it said.

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