SUMMARY of the Article “Unchanged policy rate,” Editorial, Dawn [Published on December 14th, 2023]
The State Bank of Pakistan’s (SBP) decision to maintain the key interest rate, unchanged for the fourth consecutive time since June, reflects a commitment to ensuring price stability. Despite factors suggesting a potential rate cut, such as reduced global oil prices and depressed economic growth, the SBP’s cautious stance is influenced by concerns over high inflation, falling reserves, and fragile exchange rate stability. Critics argue that both headline and core inflation readings remain high, and a premature rate cut might lead to increased imports, draining reserves and deteriorating the exchange rate. The SBP aims for medium-term price stability, targeting 5-7% CPI inflation by June 2025. The decision to keep the interest rate at 22% accounts for the recent gas price hike’s potential impact on inflation, acknowledging uncertainties and emphasizing a cautious approach. With headline inflation reaching 29.2% in November, the SBP advocates patience, emphasizing a gradual reduction in rates when inflation eases and reserves recover.
Easy/Short SUMMARY:
The State Bank of Pakistan has opted to keep the key interest rate unchanged for the fourth time since June, prioritizing price stability. Despite considerations for a rate cut due to factors like reduced oil prices and slow economic growth, the SBP remains cautious about persistently high inflation, falling reserves, and fragile exchange rates. The decision reflects a commitment to medium-term price stability, targeting 5-7% CPI inflation by June 2025. Acknowledging uncertainties, especially concerning a recent gas price hike, the SBP advocates patience and gradual rate reduction when inflation eases and reserves improve.
SOLUTIONS of The Problem:
1. Gradual Rate Reduction:
- Implement a gradual reduction in interest rates as inflation eases and foreign exchange reserves show signs of improvement.
2. Enhanced Inflation Forecasting:
- Strengthen the SBP’s capabilities for accurate inflation forecasting to avoid miscalculations that could impact monetary policy decisions.
3. Diversification of Reserves:
- Explore strategies to diversify foreign exchange reserves to mitigate risks associated with falling reserves and exchange rate volatility.
4. Monitoring Core Inflation:
- Monitor core inflation indicators closely to understand underlying economic trends and make informed decisions regarding interest rates.
5. Strategic Response to Gas Price Changes:
- Develop a strategic response plan to mitigate the impact of administered gas price changes on inflation, considering offsetting developments like fluctuations in international oil prices.
6. Improved Economic Growth Policies:
- Formulate and implement policies that stimulate economic growth to create a more balanced environment for considering rate cuts without compromising stability.
7. Collaboration for Foreign Inflows:
- Collaborate with relevant stakeholders to attract foreign official and private inflows to bolster reserves and support monetary policy decisions.
8. Public Awareness on Monetary Policies:
- Enhance public awareness about the rationale behind monetary policy decisions, fostering understanding and support for measures taken by the SBP.
9. Regular Economic Assessments:
- Conduct regular and comprehensive assessments of the economic landscape to proactively identify potential risks and adjust monetary policies accordingly.
10. Capacity Building for Inflation Management:
- Invest in capacity building within the
SBP to enhance capabilities related to inflation management, including accurate forecasting and proactive policy adjustments.
IMPORTANT Facts and Figures Given in the Article:
- Current Interest Rate: 22%
- CPI Inflation Target (June 2025): 5-7%
- Headline Inflation (November): 29.2%
- Core Inflation (November): 21.5%
- Number of Consecutive Unchanged Rates: Four times since June.
- Concerns for Rate Cut: High inflation, falling reserves, fragile exchange rates.
MCQs from the Article:
- How many times has the State Bank of Pakistan maintained the key interest rate unchanged since June?
A. Two times
B. Three times
C. Four times
D. Five times -
What is the target range for CPI inflation set by the SBP for June 2025?
A. 1-3%
B. 5-7%
C. 10-12%
D. Not mentioned in the article -
What is the headline inflation rate in November as per the article?
A. 22.7%
B. 29.2%
C. 20.5%
D. 26.9% -
Why does the SBP advocate a cautious approach regarding the interest rate cut?
A. Positive real interest rates
B. Stable currency
C. Reduced global oil prices
D. All of the above -
What does the SBP emphasize in terms of inflation forecasting?
A. Immediate rate reduction
B. Gradual economic growth policies
C. Strengthening capabilities for accurate forecasting
D. Diversification of reserves
VOCABULARY:
- Hawkish (adjective) (ہاکش): Advocating an aggressive or warlike policy, especially in foreign affairs.
- Fragile (adjective) (نازک): Easily breakable or damaged; delicate.
- Pent-up (adjective) (محبوس): Held in check, restrained, not released.
- Deteriorate (verb) (برترتیب خراب ہونا): Become progressively worse.
- Administered (adjective) (انتظامی): Managed or supervised by a government or other authority.
- Mitigate (verb) (کم کرنا): Make (something bad) less severe, serious, or painful.
- Proactive (adjective) (فعال): Creating or controlling a situation rather than just responding to it after it has happened.
- Rationale (noun) (منطقی استدلال): A set of reasons or a logical basis for a course of action or a particular belief.
- Offsetting (adjective) (توازنی): Counteracting or neutralizing the effect of something.
- Comprehensive (adjective) (جامع): Complete; including all or nearly all elements or aspects.
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Unchanged policy rate
Editorial
WITH inflation predicted to start easing, the decision taken at the State Bank’s monetary policy committee meeting to hold the key interest rate steady — for the fourth time since June — shows that the SBP is not willing to leave the goal of price stability to chance this time. Its position might appear hawkish and a case of once bitten, twice shy in view of a more stable currency, positive 12-month forward real interest rates, reduced global oil prices, a successful IMF programme review and the forecast that inflation will taper off in the coming months. Meanwhile, the depressed growth also makes a case for a rate cut.
However, others argue that both headline and core inflation readings remain high, reserves are falling as foreign official and private inflows dry up, and exchange rate stability is still fragile. A shift to monetary easing at this time, therefore, might potentially result in a spike in imports, resulting from pent-up demand and lead reserves — which are barely enough to cover two months’ imports — to drain quickly. This could cause the exchange rate to deteriorate and the current account deficit to widen, thwarting efforts to tame prices. Besides, real interest rates remain negative given the monthly inflation recordings, while Pakistan’s trading partners have positive real interest rates. Thus, a rate cut at this moment is not justified.
The SBP has, in the recent past, got its inflation forecast wrong on quite a few occasions. That it is for once trying to get ahead of the curve to achieve price stability in the medium term, targeting 5-7pc CPI inflation by the end of June 2025, should be appreciated. There is no doubt that the SBP is taking a cautious approach as the decision to leave the interest rate at the all-time high of 22pc takes into account the impact of the recent gas price hike, which, the MPC says, “may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce”. With headline inflation surging to 29.2pc in November, compared to 26.9pc in the previous month, and core inflation at 21.5pc, only slightly lower from its May peak of 22.7pc, the MPC admits that the actual impact of the administered gas prices is “relatively higher than [its] earlier expectation”. How can SBP return to monetary easing and ensure price stability when unknown risks to inflation threaten to wipe out the few gains resulting from a tighter stance? Rates must come down — but gradually, when inflation starts easing and foreign exchange reserves begin to rise. Rash decisions could land us in greater trouble. What we need the most at the moment is a little bit of patience.
Published in Dawn, December 14th, 2023