THE State Bank’s decision to keep its policy rate unchanged at 22pc doesn’t sync well with a key goal of the new $3bn IMF facility that requires it to pursue a “continued tight, proactive and data-driven monetary policy aimed at disinflation”. The decision, made on a ‘forward-looking’ basis, may eventually boomerang on the SBP, given its poor track record to correctly forecast headline inflation, and act in a timely fashion to unanchor the build-up of inflationary expectations. The bank is expecting headline consumer inflation to remain in the range of 20-22pc in FY24, falling from 29.2pc in the last fiscal and 28.2pc in July. The statement projects inflation to decelerate gradually during the first half of the present year before easing below 20pc in the second half. That implies, according to SBP projections, a significant level of positive real interest rates. Apparently, the bank has taken into account the impact of the hike of up to Rs7.5 per unit in base power tariff in its inflation forecasts for the year to leave interest rates unchanged. But it did not incorporate the inflationary effect of the almost Rs20 per litre increase in diesel and petrol prices to pass on the upward change in international oil rates to consumers as required under the IMF agreement.

The bank also appears rather optimistic in expectations of a low current account deficit, the other major factor influencing monetary policy decisions. It expects the deficit to be in the range of 0.5pc to 1.5pc of GDP. Its confidence stems from the reduction in the gap to 0.7pc last year from 4.7pc in the previous one, as well as a likely downward trend in global commodity prices. The SBP itself admits that its projections about the economy are “subject to risks arising from domestic and external shocks such as adverse climate events, and global commodity price volatility”. Besides, there also are concerns that the fiscal consolidation measures taken so far may fall short of the targets, undermining efforts to contain inflation. Therefore, it would have been much better for it to at least slightly raise the cost of borrowing to send a signal to the market that it is here to unanchor future inflationary expectations. If the idea is to boost private lending, it can’t happen even at the present rates or in the current uncertain economic conditions.

Published in Dawn, August 2nd, 2023