Factors Leading to Faster Stimulus
State Bank of Pakistan (SBP) Governor Dr. Reza Baqir has said that improvement on the Covid-19 front, stronger-than-anticipated economic growth, and a “moderately more” than expected current account deficit pushed the central bank to taper monetary stimulus “a bit faster”.
Talking to CNBC, Baqir discussed the factors that led to the central bank’s decision to raise the policy rate.
The Monetary Policy Committee (MPC) of the central bank on Friday raised the discount rate by 150 basis points to 8.75%.
“I have three comments concerning the State Bank’s recent monetary policy actions. First, Pakistan has done better than expected in limiting Covid-19,” said Baqir, adding that Pakistan had 1.3 new cases per million people compared to 65 globally, and a 0.9 percent Covid-19 positive rate compared to over 7% in nations like Russia and the US.
“Since Pakistan has done better than anticipated in containing Covid-19, the significant stimulus that we had given during Covid-19 was no longer needed,” informed the ex-IMF official.
Baqir added that the second factor behind the policy rate hike was that growth in Pakistan is “stronger than anticipated”.
The unexpected level of current account deficit, inflation led to a hike in policy rate: Dr. Reza Baqir
“Even with the tightening that we have done on Friday, the central bank expects the Pakistan economy to grow 5% this fiscal year. This is a four-year high and this growth is reflected in robust and brisk demand.”
Speaking on the last factor leading to the decision, Baqir said that as a result of stronger-than-expected growth the current account deficit widened “moderately more” than the central bank anticipation
“In the last MPC meeting, we had thought that the current account for the fiscal year would end up in the range of 2-3% of GDP, now we expect it to be moderately more than that,” said the SBP governor.
He added that the weakening of the current account deficit and a couple of other factors put “undue pressure” on the exchange rate.
“The MPC being concerned about the lagged effect of exchange rate developments on inflation thought that from a combination of these three factors it was time to begin to moderate monetary stimulus a bit faster than we had earlier anticipated.”
Pakistan’s current account deficit widened to $1.66 billion in October from a surplus of $448 million recorded in the same month last year. On a monthly basis, CAD widened 46% as compared to $1.13 billion recorded in the previous month.
Briefing on other measures taken by the State Bank to curtail CAD and ease inflation, Baqir said that Pakistan has adopted a “coordinated approach” in bringing down inflation.
“We must realize that when inflation runs high it particularly erodes the spending power of low-income households and therefore, it takes any and all actions to bring it down.
“The government has a very proactive and coordinated stance to try to relieve supply bottlenecks so that produce gets from the farms to the market in a timely manner, and also to ensure that there is no hoarding and speculation in the prices of basic commodities.”
He said that the second factor affecting inflation is international commodity prices. “Unfortunately, there is not much that emerging markets can do on that front, because not passing through international prices for instance just leads to a buildup of imbalances, whether on the fiscal or on the external side.”
The central bank head, however, pointed out they could “moderate the domestic demand so that inflation expectations and demand-side factors do not add to the supply side factors that already exist.”
Baqir said that measure of increasing the Cash Reserve Requirement (CRR) rate was used, which “was primarily meant to mop up liquidity because money growth has recently been growing slightly ahead of its trend”.
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