FOR the first time this year, the State Bank has said that “headline inflation is expected to reverse its declining momentum” in the months to come.

On two occasions earlier this year — January and March — the central bank had also cautioned about a possible reversal in declining inflation, but that note of caution was pegged on a hypothetical “increase in aggregate demand” and possible reversal in the downward trend of oil prices.

Also read: State Bank holds fire on policy rate

All the three other monetary policy statements since March saw continuing decline in inflation in the months that followed.

Moreover, the warning note in the latest monetary policy statement is based on market surveys, meaning it is empirically grounded and not deduced, and therefore far more likely to drive the direction of future interest rate decisions.

If the findings of the surveys that the bank is relying on are borne out, it could prove to be a significant macroeconomic turning point.

The statement falls short of reasonable expectations in its treatment of the developments on the external sector. In September, the bank had flagged exports and foreign direct investment as “imperative for sustainability of external sector”.

This time, after noting “a year on year 10.6pc contraction in exports”, the bank has left us simply with the advice that “continued flow of external resources” is required to maintain stability in the balance of payments. We are not told what to expect regarding this continued flow that appears to be so important.

The State Bank appears to have retreated from its earlier cautionary soundings about mounting external debt service obligations, and it is difficult to escape the impression that this has been done at the behest of the government which enjoys basking in the glow of the reserves that it claims to have accumulated.

This is a pity because external debt service obligations remain a key area of concern, especially given the resumption of Paris Club repayments in 2017 that were rescheduled in the days following the events of 9/11.

At the end one is left wondering whether the brakes are being applied to the monetary easing on account of any perceived uptick in inflation, or on weaknesses around the exchange rate.

The alarms bells of an impending reversal of a declining trend in inflation are important, but equally significant is the retreat on the vulnerabilities of the external sector, especially in light of the most recent round of volatile movements in the open market.

Published in Dawn, November 25th, 2015