MPS: An end to monetary tightening?

July 17, 2019 (MLN): Without any surprises, the State Bank of Pakistan (SBP) on Tuesday, decided to raise a policy rate by 1% to 13.25% and Discount Rate to 13.75%, as a pre-emptive move after taking into account upside inflationary pressures from exchange rate depreciation, recent adjustments in utility prices and other measures in the federal annual budget for the fiscal year 2019-20.

As a result of SBP’s stepped up efforts to address macroeconomic challenges, this marks the seventh consecutive rate hike, with the cumulative tightening of 750bps in the current cycle.

The decision came with no surprises as it was in-line with market expectations, moreover, taking into account current considerations and evolving macroeconomic challenges, the SBP while announcing this symbolic decision, clearly hinted with positive tone that the adjustments related to interest rates and the exchange rate from previously accumulated imbalances have taken place.

Senior economic analyst from BMA Capital has termed this decision as expected one by saying that the inflation is expected to peak in 1HFY19 and then will subside in 2HFY20. “The real interest rate is at comfortable level; thus, no further monetary tightening is expected going forward,” he added.

In line with the above statement, another senior economic analyst Samiullah Tariq has said that “this rate hike is possibly the last hike if no unforeseen circumstances occur, moreover, uncertainty in the market has cleared as SBP has given the policy direction and inflation is expected to clock in between 7% to 8% in next year."

Meanwhile, Khurram Shahzad, an independent economic analyst while giving his views to Mettis Link News has said that, the hike in interest rate cannot control the planned inflation, however, core inflation might not increase. Adding that, as SBP is expecting a softening in aggregate demand and current account deficit is under control now, this would provide grounds for the beginning of monetary easing.

From a monetary policy perspective, the austerity measures that the current government has taken so far and the government’s strong commitment to cease its borrowing from the SBP, would positively contribute towards monetary policy transmission. Moreover, improved outlook of external financing after International Monetary Fund’s Extended Fund Facility approval and disbursement of the first tranche along with other support from multilateral and bilateral partners and the continuous decline in CAD suggests that the external pressures will continue to decline.

Keeping the recent developments and monetary policy statement in view, it can be said that the monetary tightening might be near to its end.

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