State Bank clarifies monetary policy stance

KARACHI: The State Bank of Pakistan (SBP) on Monday clarified media reports over its stance on the recently announced monetary policy.

The SBP said that over the last few weeks, certain sections of the media, including op-eds have expressed concerns over the actions of the State Bank of Pakistan, particularly regarding the monetary policy decisions and the role of the Covid-related monetary accommodation in fueling the currently elevated inflation outturns.

The SBP would like to address these concerns and offer some clarifications.

First, while referencing the status quo monetary policy decisions in the earlier half of 2021, certain op-eds have implied that the central bank had absolved itself of its responsibility to combat inflation when it was rising. Such points are all easier made in hindsight but “let us remind ourselves what the situation was actually like back in May and July 2021”.

The demand-side pressures appeared contained with spare capacity in the economy, price pressures were concentrated in a few items, wage growth was subdued and inflation expectations were reasonably anchored, it said. Moreover, any inflationary concerns were dwarfed by the fact that Pakistan was going through the third and subsequently the more virulent and uncertain fourth Delta-variant wave of the Covid-19 pandemic.

There were a few occasions when micro lockdowns were imposed, while the vaccine rollout was not as extensive as it is currently, the central bank said.

Globally as well, the Covid cases were spiraling upwards, driven primarily by the Delta variant. At such a time of elevated uncertainty about the future trajectory of the pandemic, the Monetary Policy Committee adopted a prudent policy stance by keeping the interest rates unchanged, so as to not preemptively disrupt the economic activity.

It is quite easy, in hindsight, to criticise this decision even though no tangible alternatives were proposed in the op-eds or elsewhere at the time. By contrast, the policymaking involves taking calculated decisions in real-time, when the future is uncertain and considerations need to be carefully balanced. This is especially so in the face of a shock like Covid, for which the policymakers have no rulebook.

Second, in the middle of a once-in-a-century pandemic, it would be imprudent to solely superimpose classical economic theories onto data outturns. The policymakers, economists and businesses around the world did not know how the global or domestic economy would evolve in response to mobility restrictions of varying stringencies in different locations.

Similarly, there was, and in fact continues to be, heightened uncertainty regarding price-setting behaviour. For instance, there is an ongoing debate in the global policy circles and financial markets over whether the ongoing bout of inflation is transitory in nature or not.

In the face of an unprecedented shock like the Covid, invoking supposed historical, textbook patterns of overheating, as in the op-eds, is facile, the State Bank said, adding that under such circumstances, as the policymakers around the world acknowledged, the costs of normalising policies too soon outweigh those of waiting for more clarity on the path of inflation and output.

As that uncertainty has recently waned in Pakistan, the monetary policy is being appropriately normalised.

Third, some commentary has seemingly attributed the currently higher inflation to the growth in broad money supply. In this regard, the SBP would like to point out that at the start of the pandemic in March 2020 and for the subsequent few months, real broad money balances were, in fact, below the pre-Covid trend. If allowed to continue, a liquidity crisis would have turned into a solvency one, multiplying the contractionary impact of the Covid-19 on real GDP growth.

To stave off this stark outcome, and to extend the needed support to businesses and households, the SBP and the government introduced unprecedented stimulative policy measures. As a consequence, the real money balances recovered as intended. Not providing this support would have risked worsening and prolonging the loss in output and employment that accompanied the Covid shock, it added.

Lastly, the State Bank would like to reiterate that its policy stance is geared towards price stability, while playing its due role in contributing to the economic growth and development. Getting this balance right through various stages; following the Covid, has been the key goal of the monetary policy, and helps explain the path of policy actions, it added.