The MPC met eight times to decide the policy rate but couldn't win against inflation

By Ariba Shahid

Ending 2022 on a low hasn’t been easy; especially when inflation and interest rates are at a multiyear high.

Despite being in negative real rates territory, the State Bank of Pakistan (SBP) in its annual report, however, says that the Monetary Policy Committee (MPC) has reversed the accommodative monetary stance. “The monetary policy committee reversed the accommodative monetary policy stance and increased the policy rate by a cumulative 675 bps during FY22, as a host of domestic and global developments weighed heavily on Pakistan’s performance and increased the risks to macroeconomic stability during the year,” read the report. This calendar year, the SBP hiked the policy rate by a cumulative 625 bps. Pakistan’s central bank has been one of the seventh most aggressive rate hikers in the world during the calendar year. War struck Ukraine stands at number one, followed by Hungary, debt stuck Sri Lanka, Colombia, Chile, and Kazakhstan at number six. Despite such a large jump bringing the policy rate to 16%, the SBP has not managed to contain inflation. Here is a summary of the SBP MPC meetings over the year.

January 24, 2022

We entered 2022 with a 9.75% interest rate. The first MPC meeting of the year was on January 24, 2022. The MPC decided to leave the policy rate unchanged. This was done “in line with the forward guidance provided in the last monetary policy statement.”

During the last MPC meeting of 2021, the SBP hiked the policy rate by 100bps and locked itself into long-term open market operations (OMO) injections. At this point, the SBP noted that following the last meeting, the demand moderating measures undertaken such as raising policy rates, higher bank cash reserve requirements, regulatory tightening of consumer finance, and the curtailment of nonessential imports; had gained traction and improved the outlook for inflation.

“Looking ahead, and against the backdrop of these developments that have improved the inflation outlook, the MPC was of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7%, support growth, and maintain external stability,” read the statement.

March 8, 2022

Status quo again! The MPC decided to keep the policy rate unchanged at 9.75% as “the outlook for inflation has improved following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package.” This refers to PM Imran Khan’s announcement of subsidising fuel prices and other relief measures announced. Regarding the relief, the MPC added, “Under the assumption that the recently announced relief package will not add to the fiscal deficit due to other offsetting savings, inflation should be lower through the rest of the fiscal year than earlier estimated. The MPC, however, did say that if required, it is ready to meet and take steps when needed.

April 7, 2022

Earlier than expected, the MPC called an emergency meeting and hiked the policy rate by 250 bps as inflation forecasts had been revised upwards to slightly above 11% in FY22. Political uncertainty at this point was at a high. The MPC even remarked on the 5% depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting. Very important to note that PM Imran Khan was ousted through a vote of no confidence two days later.

The policy rate was increased as the inflation rate was persistently higher than the interest rates. The SBP hiked the policy rate to bridge the gap and to bring the forward-looking real interest rates to mildly positive territory.

The SBP announced its decision to take further actions to reduce pressures on inflation and the current account, namely an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements.

May 23, 2022

Another policy rate hike. The MPC raised the monetary policy rate by 150 bps bringing it to 13.75%. This was the first MPC following Reza Baqir retiring as governor SBP; with Murtaza Syed, Deputy Governor acting as governor SBP.

“This action, together with much-needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability,” read the statement.

The MPC at this point remarked that Pakistan’s economy, after contracting by 0.9% in FY20 in the wake of Covid, has rebounded much more strongly than anticipated, growing by 5.7% last year and accelerating to 5.97% this year, as per provisional estimates.

The MPC also highlighted that instead of the budgeted consolidation, the fiscal stance in FY22 is now expected to be expansionary.

Stepping out of character, the SBP called upon fiscal action. “Timely action is needed to restore fiscal prudence while providing adequate and targeted social protection to the most vulnerable.”

July 7, 2023

The MPC decided the hike the policy rate by 125 bps to 15%. It also announced that the interest rates on EFS and LTFF loans would be linked

to the policy rate to strengthen monetary policy transmission while continuing to incentivise exports by presently offering a discount of 500 bps relative to the policy rate.

While the MPC in the past had commented on how the energy subsidy would result in lower-than-expected inflation; in July it called it unsustainable.

“Since the last meeting, the MPC noted three encouraging developments. First, the unsustainable energy subsidy package was reversed and an FY23 budget centered on strong fiscal consolidation was passed. This has paved the way for completion of the on-going review of the IMF programme, which will ensure that tail risks associated with meeting Pakistan’s external financing needs are averted.”

This mirrors the sentiment of the May MPC meeting whereby a call for fiscal prudence was made.

At this point headline inflation grew from 13.8% year on year in May 2022 to 21.3% in June; the highest since 2008. The SBP called this a broad-based increase. More than 80% of the items in the CPI basket experienced inflation of above 6%.

August 22, 2022

The SBP finally found a governor. Jameed Ahmed was appointed on August 19. During his first meeting as governor, the hiking streak took a pause and the MPC decided to maintain the policy rate at 15%. The MPC pointed out that from September 2021 to date the policy rate had been hiked a cumulative 800 bps, and administrative steps had been taken to curtain imports. Despite all that, headline inflation rose further to 24.9% in July, with core inflation also ticking up. “This was expected given the necessary reversal of the energy subsidy package—effects of which will continue to manifest in inflation out-turns throughout the rest of the fiscal year—as well as momentum in the prices of essential food items and exchange rate weakness last month.”

It is important to note that the SBP called it a necessary reversal.

At this point in time, the MPC expected inflation to decline sharply and fall to the 5-7% target range by the end of FY24, supported by the lagged effects of tight monetary and fiscal policies, the normalisation of global commodity prices, and beneficial base effects.

October 10, 2022

The MPC made another decision to maintain the policy rate at 15%. This was due to the “continued deceleration in economic activity as well as the decline in headline inflation and the current account deficit since the last meeting.” The floods, however, acted as an exogenous shock to economic planning. The SBP felt that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods. It did mention that inflation could be higher and more persistent due to the supply shock to food prices. The MPC felt that because of the flood, growth prospects had weakened, which would reduce demand-side pressures and suppress underlying inflation. In light of these offsetting considerations, the MPC considered it prudent to leave monetary policy settings unchanged at that stage.

November 25, 2022

The last MPC meeting of the calendar year ended with a 100 bps rise in the policy rate to 16%. This was an unexpected rate hike considering the floods in Pakistan. However, it was not unwarranted as the inflationary pressures have proven to be stronger and more persistent than expected. Inflation increased sharply in October. The SBP called the previous month’s administrative cut to electricity prices “unwound”. The MPC added that it will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.

The tldr:

To sum it up, this year was marked with financial challenges. However, for the SBP one challenge was consolidation in the fiscal and monetary policy. Having an expansionary fiscal policy, while monetary tightening is underway is counterproductive. The major challenge for the SBP this year has not been the development of digital products or increasing financial inclusion. Instead, it has been tackling inflation and shoring up reserves. We’re ending the year with inflation clocking in at 23% in November, the reserves at a multi-year low of $5.8 billion dollars, and the import cover of fewer than 1.1 months. However, despite the hikes; the question of whether this is enough to curtain inflation remains, especially in a cost-push inflationary landscape. n

‘Country has beautiful, prosperous, future’ says man who won’t be in country this time next year

By The Dependent

NO MAN’S LAND – An important sounding man, while addressing a ceremony featuring some semi-important people hoping to be told what they wanted to hear, reassured the audience that the country has a beautiful and prosperous future.

These words were uttered by a man who, experts reiterate, will not be a part of this country’s future.

“We hear every day that the country will default. There is no chance of that as long as I am here,” said the man who might not be here for too long.

“The country can progress and it will. The country has a beautiful future irrespective of whether I am here or not,” he added, clearly looking to throw the possibility of his eventual departure into the reassurance mix.

When pressed to address the harsh realities evident both empirically and statistically the important sounding man conceded that things were indeed tough.

“Yes, we are in a tight position, but that is not my fault,” he added in a matter-of-fact tone amidst quizzical expressions in the audience.

“So don’t come running after me to the UK if things don’t go as you hope they will next year,” the important sounding man insisted.

“Other than that, there’s absolutely no reason to be worried about the country’s future.”