Reduction in policy rate to be suggested to State Bank as headline inflation drops

ISLAMABAD: The Monetary and Fiscal Policies Coordination Board (MFPCB) has been rescheduled again to meet on March 9 for suggesting reduction in policy rate, reported The News on Tuesday. 

The headline inflation has come down from 14.6% in January to 12.4% in February 2020. The MFPCB will meet under the chairmanship of Adviser to PM on Finance Dr Abdul Hafeez Shaikh next week for suggesting measures aimed at improved coordination between the monetary and fiscal policies.

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The fiscal policy is the domain of the federal government and monetary policy is the jurisdiction of the State Bank of Pakistan. The MFPCB was constituted for the purpose of placing institutional mechanism for ensuring coordination between the fiscal and monetary policies. 

The higher policy rate had a devastating impact on the fiscal side as it caused an unprecedented hike in interest payments on loans and further worsened the fiscal situation of the federal government. The debt servicing payment has become the single largest ticket item of the expenditure in the government. 

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Adviser to Prime Minister on Finance and Revenues Dr Abdul Hafeez Shaikh had postponed the meeting of MFPCB last week on the eve of US secretary commerce's visit to Islamabad, but now the meeting was re-convened for the coming Monday on March 9. 

"It was the mandate of the Monetary Policy Committee of State Bank of Pakistan (SBP) for taking a decision on the policy rate as it was kept at 13.25 percent for last several months," said a top official of the government while talking to The News on Monday.

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"But the MFPCB is the right forum where the federal government, through representation of different ministries, can speak up and share their minds at institutional levels with the State Bank of Pakistan (SBP) because continuous higher policy rates have really choked the economic activities."

The last meeting of MFPCB was held in August 2019, and no meeting could take place in the more than six months period since. Another top official of the government argued that on the eve of the last monetary policy that was announced in January 2020, it was not possible for the MPC of the SBP to reduce the policy rate. 

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"When the SPI figures were showing upward trends on that occasion, it was not appropriate to reduce the policy rate at that point of time," the official added.

"The Planning Commission and Ministry of Commerce are going to suggest during the MFPCB meeting a reduction in policy rate in the range of 25 to 50 basis points to the SBP in order to give signal to the markets that the economy is on the path of revival," said official sources.

Originally published in The News