The State Bank of Pakistan on Saturday announced the new monetary policy for the next two months reducing the interest rate further by 50 basis points. The central bank reduced interest rate by 0.5 percent and brought it down to six percent. The State Bank of Pakistan noted year-on-year headline CPI inflation to have decelerated to 1.7 percent in August 2015 from 7.0 percent in August 2014. Following its declining trend of the past several months, the 12-month moving average CPI inflation came down to 3.6 percent in August 2015 from 8.4 percent in August 2014. A press release from the State Bank noted, “With better law and order situation, investor and consumer confidence is improving. After recording a growth of 3.3 percent, Large-scale Manufacturing is expected to gain further traction at the back of improvement in energy supplies. Inflation may well be coming down, and the bank is clear enough in pointing towards the reasons behind the sustained declines seen in this area. But inflation is not the only indicator coming down. Foreign investment and exports are also registering steep declines, as is private-sector utilisation of bank credit. Deposit growth has slowed quite fast since July and large-scale manufacturing remains in the doldrums. What does one make of an economy where consumption is high but investment is low? Where remittances and borrowing are financing imports as exports languish? These are important questions and the State Bank has taken some trouble to avoid addressing them in any meaningful way in its latest monetary policy statement. Instead, the announcement of a rate cut — which was expected — is couched within an analysis of the economy that is part hope and part prayer. In previous announcements, the State Bank used to point towards declining manufacturing numbers by saying that lower interest rates would help reverse that trend. When sustained lower interest rates did not cause an uptick in manufacturing activity, this time they changed the variable on which they have pegged their hopes; instead, we are being told that better law and order and improved energy supplies is likely to give further “traction” to manufacturing. Where exactly will the “improvement in energy supplies” come from? Simply a decline in global prices? How come that decline hasn’t produced such “traction” in the past one year? Or will it be the China corridor projects that will spur growth?
pk.shafaqna.com
