No need to create recession: SBP Chief

Business reporter
ISLAMABAD: Acting State Bank of Pakistan (SBP) Governor Dr Murtaza Syed has said that Pakistan will not risk creating economic recession for the sake of achieving inflation-adjusted positive interest rate, soothing market’s fears of a further rise in the rate after inflation soared to 25%.
In an interview with The Express Tribune, the acting governor agreed that there was a need for having better coordination mechanisms for aligning monetary and fiscal policies – an approach that appears different to the one adopted by the previous governor.
“We do not have to create economic recession to bring inflation down and real positive interest rate can be achieved in the longer run,” said the governor.
He elaborated that economic conditions would determine when to achieve the positive interest rate.
Compared to the average 18% to 20% inflation projection, the real interest rate is still negative by 3% to 5%. Pakistan has committed to the International Monetary Fund (IMF) that it will ensure a positive real interest rate.
The central bank increased the key policy rate by 125 basis points (bps) to 15% on July 7 to fight the surging inflation amid sharp depreciation of the rupee.
It was the sixth rate hike since the central bank started monetary policy tightening in September last year, pushing borrowing cost to the highest level since April 1999.
However, the inflation rate soared to 24.9% in July, which raised concerns that the central bank may further tighten the monetary policy. However, the governor disagreed.
He said there was no need to give a knee-jerk reaction to such shocks, as the central bank’s average inflation forecast remained unchanged in the range of 18% to 20% for the current fiscal year.
“Our forecasting is fairly good and during the past three to four years we have remained closer to the average inflation forecast,” he added. The 25% inflation in July was in line with the central bank’s expectation.
Unfortunately, the difficult decision to reverse the fuel price subsidy showed up as “extra inflation”. Had prices been increased smoothly instead of keeping those suppressed for four months, the inflation would not have shot up to 25%, said the acting governor.