It is almost as if the Monetary Policy Committee of the State Bank of Pakistan had not done enough, It had just f0llowed its previous cut of 150 basis [points in the policy rate with a further cut of 100 basis points in its lst meeting on Monday, that Finance Minister Muhammad Aurangzeb said that inflation was down, so the policy rate should as well. After inflation for the first month 0of the new financial year clocked in at 11.8 percent, some in the Finance Ministry began to talk of inflation for the whole year touching single digits. That may be the result of over-excitement, for that requires the policy rate to be brought down even further.
If indeed inflation does come down, should the policy rate also not be brought down.to about 500 basis points above the inflation rate (which would be about17 percent at present), there will develop the danger of squeezing growth to the point where the economy is tipped into recession. At the moment, the combination of low growth and high inflation means the economy is trapped in a stagflationary cycle. Any further squeezing of the money supply through the policy rate remaining too high would prevent the new investment needed for growth. The government needs that growth badly, for households are experiencing both members going onto the job market, but not finding employment, as well as employed members either losing jobs or facing the danger thereof. One of the pluses for the present government is that the downturn in inflation is led by food inflation. The government’s concern with inflation is limited to its effect on the electorate, and it is food prices that the man in the street notices the most.
At the moment, inflation has not come down so much that people would notice. Anyhow, as prices are nowhere near coming down, there is little chance of people sitting up and taking notice. Of those who should be taking notice, the rate cut seems to be against the IMF’s advice that rates should be kept up. There is some wisdom in that, for rates cannot be jiggled in response of one day’s inflation reading. One reason Mr Aurangzeb wants rates down is that the government’s debt servicing costs would go down. Considering that the budget deficit target (another MIF condition) was missed last year because of increased debt servicing costs, it is an important consideration.
