Monetary Policy, a cut so deep

Du Café

Monetary Policy – A cut so deep in depositors’ pocket

Financial markets were discussing a cut in State Bank of Pakistan policy rate after since July inflation numbers were released, CSF money strengthened the notion, secondary markets bond yield imbedded it and government of Pakistan forth nightly t-bills auction cut offs cemented it. The thing not accounted for in the entire story was a cut far deeper than market expectations. 150 basis point cut took the policy rate to as low as they were in Feb 2008. The policy statement read, “Central Board of Directors of SBP has decided to give a relatively higher weigh to the state of private sector credit and investment in the economy, knowing that the projected inflation for FY13 could remain slightly higher than the target.”

If you read the entire policy statement you would feel a major player of financial world is missing, depositors. Banks were not paying them much and after the cut will pay even lesser, national saving rates would plunge and the depositors will also have to pay for the “slightly higher inflation than the target”. Going forward they will be on banks’ mercy, some may say they already are. Indeed, stock market is one option available though it is like getting out of a trouble to enter another. I am taking you slightly off the track, according to anecdotal information; anomalies and retail investors ripping reported in three company’s financial results announcements. The exchange, the regulator and the broker community are all but quite on these incidents.

Indeed, business community will pay lesser for their borrowed money provided they have borrowed some. Policy statement states despite 200bps rate cut in first half of FY12 fails to life private sector credit. Private sector borrowed only Rs 18 billion; in fact most opt to repay earlier loans and let’s face it bank are not lending them either amid they have a more secure lender “the government. Every bank has thousand of litigation cases pending with business community. Energy crisis, law in order and higher cost of production proved lethal for many, those who are still alive would get some relief in interest payment. But to say a cut would increase investment, well…… miracle happens.  

And then the Government borrowings from SBP, a clear violation of central bank Act; but who is providing liquidity to bank so they can lend it to government. The entire episode is creating a spiral SBP injects money through reverse repo at rate (X); banks lend it to government at slightly higher rate(Y) and keeps the difference (X-Y). A rate cut may change x and y value but outcome will not change. Bank will receives less but will pay even lesser. In fact, lower rate would create room to roll the spiral even further. Thus I believe this rate cut benefit government the most. Besides, central bank believes GDP growth will be lower than projection during FY13, this mean lesser revenue or more borrowings. Why SBP is not handling it with iron hand, replies the governor he has to ensure smooth functioning of financial system. I wonder why we take pain of making long sophisticated laws when breaching can be justified in a mere sentence.

SBP believes this trend can never be reverted without considerable fiscal reforms. In simple SBP is advocating change. Question is why somebody would change smooth sailing course due to XYZ reasons.

Let’s face it; SBP is only doing what they have been told to do.   

Riaz Andy

11 August 2012

Karachi