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SBP explains its policy decisions – Daily Times

According to a statement released by the State Bank of Pakistan (SBP) on Thursday, it has addressed the concerns of the media, including op-eds, about the SBP’s recent monetary policy decisions and the role of the Covid-related financial accommodation in causing the current high inflation levels.

“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. 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,” the statement said.

Because Pakistan was experiencing the 3rd and 4th Delta-variant waves of Covid-19, any inflationary concerns were overshadowed by these events. Micro lockdowns were imposed on a few occasions when the vaccine rollout was less extensive than it is now. Covid cases were on the rise around the world, driven by the Delta variant. The Monetary Policy Committee decided to keep interest rates unchanged at a time of high uncertainty about the pandemic’s future trajectory, so as not to disrupt economic activity.

After the fact, it’s easy to criticise this decision, but no concrete alternatives were offered in the op-eds or elsewhere. Policymaking, on the other hand, necessitates making decisions in the here and now, when the future is uncertain and considerations must be carefully weighed. Covid is an example of a situation where policymakers lack a guidebook.

There are two reasons why it would be inappropriate to apply only classical economic theories to data in the middle of an unprecedented pandemic. The global and domestic economies were unknown to policymakers, economists, and businesses around the world as a result of varying levels of mobility restrictions in different locations. Price-setting behaviour has also been fraught with uncertainty, which persists to this day. Global policymakers and financial markets are currently debating whether or not the current bout of inflation is a temporary phenomenon.

It’s a cliche to invoke historical, textbook overheating patterns when confronted with an unprecedented shock-like Covid. It is better to wait for more clarity on inflation and output before normalising policies, as policymakers around the world have acknowledged.

Pakistan’s monetary policy has been normalised as the country’s economic uncertainty has decreased. Third, some commentators have suggested that the recent rise in inflation can be attributed to an increase in the overall money supply. Real broad money balances were in fact lower than pre-Covid trends at the beginning of March 2020 and for a few months thereafter. This is something the SBP wants to point out. Covid-19’s contractionary effect on real GDP growth would have been magnified if the liquidity crisis had been allowed to continue. The SBP and the government enacted unprecedented policy measures in order to avert this dire outcome and to support businesses and households.

As a result, the balances of real money were restored as planned. If this support had not been provided, the output and employment losses that came along with the Covid shock could have been exacerbated and prolonged. Finally, the SBP would like to stress that its policy aims to maintain price stability while also playing an important role in promoting economic growth and development. The goal of monetary policy since Covid has been to achieve this balance External Relations Department Page 2 in the various stages, which helps explain the path of policy actions.

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Source: Daily Times

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