15% policy rate
knocking on the door By Ariba Shahid
T
he Karachi Interbank offered rate, simply known as KIBOR, hit a 13 year high of 14.1% on Tuesday. While it might seem so, the KIBOR is not trying to mimic petrol prices by being at a high, instead this is telling of a larger pattern that has been present in the money markets over a period of time. The markets are pricing in for a policy rate hike. At this point, you’re probably rolling your eyes because we’ve been saying that for the past few months. However, while it has been true for the past few months, yet things aren’t really changing.
The buildup
D
uring COVID 19, in order to support the economy, the SBP decided to increase money supply by bringing down interest rates. This was to provide liquidity to businesses and the markets in order to keep them afloat during uncertain times. Although the move was inflationary, it was probably important at that time. Besides, Central Banks hadn’t really prepared for a virus that changes life as we know it. However, once things started resuming back to normal, the SBP could no longer keep the policy rate at 7%. This is because the IMF also requires the SBP to maintain positive real interest rates. The tightening cycle thus began in 2021. The SBP planned on gradually moving
16
towards higher interest rates which can be seen by the fact that it hiked by 25bps in 2021. The next few hikes were sudden and drastic. The SBP had not only hiked the policy rate by 150 bps in November, but had also increased the Cash Reserve Requirement (CRR) for banks to mop up excess liquidity and bring down money supply driven inflation, i.e. demand pull inflation where too much money is chasing too few goods. At that time, the SBP was catching up with the markets. The severity of this can be gauged by the fact that the SBP called the monetary policy committee meeting earlier than scheduled. Baqir had, at the time, told Profit, “Central banks don’t have crystal balls and sometimes developments do take place, which may be a little bit more than not anticipated in those circumstances.” He also said that the end goal is “mildly positive real interest rates”, which has been expressed in forward guidance issued by the SBP multiple times. The markets, however, expected the tightening cycle to speed up, especially with the trajectory at which inflation was rising. In April 2021, the SBP held an emergency MPC meeting and
hiked policy rates by a massive 250 bps. This meeting was around 9 before the planned MPC. The reason was simple, the SBP had to catch up with the markets. However, the SBP canceled the scheduled MPC meeting. In the past, the SBP has kept the policy rate unchanged without releasing a statement, they could have done the same without canceling the meeting, and however, it is assumed that this was done so that markets do not assume the tightening is going to slow down.
Koonda time
T
he banks had started to show the SBP and the government that they’re anticipating rate hikes by bidding at high yields. The finance minister of the time, Shaukat Tarin warned them against
