Two views seem to have clearly emerged about the conduct of monetary policy in the country. There are several analysts who think that there is now enough evidence to suggest that the monetary policy stance of the State Bank needs to be eased.
With import growth contained and a steady downward trend achieved in (non-food, non-energy) core inflation, the SBP is in a position to reverse its tight policy and ease interest rates as early as the first quarter of 2007.
The September 2006 inflation at 8.73 percent was lower than 8.93 percent a month earlier despite greater pressure on food prices which may continue for another two or three months due to the recent disruption in the supply chain as well as impact of the increase in the support price of wheat. More importantly, the pace of decline in core inflation seems to have accelerated since June this year. The September Y/Y core inflation at 6.16 percent was at its lowest level since late 2004.
A slide in world oil prices combined with a decline in the value of machinery imports is expected to have a positive impact on the balance of payments. Monetary data so far has indicated a mixed picture with M2 as well as reserve many growth significantly higher but utilisation of credit by the private sector substantially lower than that in the corresponding period of last year. The easing of monetary policy should, however, be contingent on continuation of current trends in the relevant data.
Those who argue for the maintenance of tight monetary stance, including the SBP, do not see any reason for a change in their position, at least for the time being.
According to their assessment, though the underlying excess demand pressures in the economy have been curbed following upward adjustment in the discount rate (SBP three-day Repo Rate) and reserve requirements supplemented by proactive open market operations and core inflation has been brought down, there are still a number of factors requiring the continuation of current monetary stance. The monetary expansion till mid-October, 2006 was 18 percent compared with the Credit Plan target of 13.5 percent due to excessive government borrowings from the banking system.
Tags: balance of payments, core inflation, economy, government, Import, inflation, interest rate, interest rates, market, monetary, monetary policy, Private