FPCCI says raising interest rates won’t help curb inflation

KARACHI: The apex trade body urged the State Bank of Pakistan (SBP) to avoid an increase in the policy rate on Tuesday, saying raising interest rates as an approach to tame inflation had turned out “futile”.

Speculations about an emergency monetary policy committee meeting proved true when the central bank announced a preponed meeting on Thursday, March 2, earlier than the scheduled meeting on March 16.

Reports are that the SBP may maintain a tight monetary policy and raise the rate up to 300-400 basis points (bps). Monetary policy, one of the core economic policies, is used across the world to tame inflation that is induced by high demand amid an overheated economy.

“The hikes in the policy rate, however, appear redundant globally as the recent inflationary spirals are mainly induced by supply-side factors,” Federation of Pakistan Chambers of Commerce and Industry (FPCCI) stated in a letter to the SBP.

The trade body argued that countries such as Brazil, Chile, Hungary, New Zealand, Norway, Peru, and Poland had started raising interest rates aggressively before America’s Federal Reserve, but failed in containing inflation and eventually had their economies crushed.

“Inflation in Pakistan appears more entrenched, which mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs, and other prescribed measures under the IMF programme,” the letter said.

Despite an episodic hike in the policy rates by 725bps from 9.75 percent to 17 percent between January 2022 and January 2023, general inflation surged from 13 percent to 27.6 percent over the same period, according to FPCCI.

“This raises the question of policy rate efficacy in curbing inflation.” it stated. The letter quoted the World Bank Enterprise Survey 2013, saying Pakistan's economy was weakly integrated with the financial sector with only 7 percent of firms raising finances via formal credit lending institutions.

“This is considerably lower than peer countries including India (21 percent), China (25 percent), and Bangladesh (34 percent).” Pakistan's current policy rate of 17.00 percent, it continued, was well above the regional peers including China, India, and Bangladesh for which the policy rates are 2.75 percent, 6.50 percent and 6.00 percent respectively.

FPCCI was of the view that SBP approach to tame inflation by increasing the policy rate had turned out futile and had adversely impacted the economy, deteriorated the fiscal equation of the country, and hit hard the already struggling business community.

The pre-conditions for completion of the 9" review amid the resumption of the International Monetary Fund (IMF) programme are expected to fuel inflation further, which “can't be tackled through levering policy rates.”

FPCCI said it had been regularly advising against regular increases in the policy rate, and reiterated its stance against any further hike in policy rates.

“We strongly urge that the SBP should look into alternatives to combat the emerging inflationary spirals. Similarly, prudential regulatory measures should be utilised to curb demand pull in particular sectors as the monetary policy measures have differential impacts on the spectrum of industries and income classes,” the apex body stated.

The letter emphasised that efforts were needed to control price manipulation and hoardings in liaison with the respective federal and provincial government departments.

“An active Competitive Commission of Pakistan and an effective price control magistracy system also need to play their due role,” it said.