The state bank’s hawkish squeeze on money supply, by driving up the benchmark interest rate so sharply, has clearly failed to rein in inflation as the sensitive price index (SPI) just climbed to a record 42.3 percent year-on-year in the week that ended on Aug18.
That only goes to show, as repeatedly argued in this space, that the unprecedented price hike being experienced in Pakistan is almost entirely driven by the supply side, including the so-called commodity super cycle in the international market and far too many extra-market forces (read interest groups, mafia, etc) at play in the local market. Yet expectations have once again tilted in favour of another interest rate hike as the monetary policy committee prepares to meet. That is sure to rub industry the wrong way as they’re already struggling with steeply rising cost of money as the business environment becomes more competitive by the day in a world still rebounding from painful and traumatic Covid lockdowns.
It would ordinarily make a lot of sense to tighten monetary policy to mop up excess money supply. But when it’s not roaring aggregate demand that pushes up prices, instead its supply side constraints causing cost-push inflation, there’s only so much interest rates can do.
How many rate hikes will it take, for example, to sort out supply chain bottle necks caused by the Russia-Ukraine war? Or how many MPC meetings should be required to sort out market manipulators? These issues are simply outside the jurisdiction of the monetary sector and the state bank, just like the rest of is, is but a helpless spectator as prices flirt with the stratosphere. Therefore the sooner the government flexes its muscles and cracks down on special interest groups, the better.
Also, things like regaining our comparative advantage in sectors like agriculture, which enabled us to sell wheat and grain instead of importing our staple food, is essential if these cycles of high prices are to stop harassing the local public. These are long term issues, no doubt, but a start has to be made somewhere. *