Monetary Policy: Corona calls for extraordinary response, (AKD Daily, Mar 17, 2020)
AKD Daily
Monetary Policy: Corona calls for extraordinary response
- Adhering to the age old axiom, ‘extraordinary times call for extraordinary measures’, Central Banks globally are aggressively slashing rates to mitigate economic adversity arising from the cratering of demand following COVID-19 pandemic
- Yesterday’s sharp rise in the number of confirmed cases at home (134 new cases, taking total to 187) has brought a sense of urgency to elicit a strong policy response both monetary and otherwise (augmenting health care systems) and prompt the impulse for panic buying, stressing inventories. For an economy already in the midst of a slowdown, further downsides are apparent.
- Our correspondence with industry players also indicates a potential slowdown. Exporters are facing delay or cancellation in orders from clients, particularly the EU, while the impact of supply disruptions particularly from China are likely to take effect in the next few weeks
- With visible slowdown in economic activities and potential for the private sector to face heightened stress, the SBP can deviate from its monetary policy framework of inflation targeting through an aggressive rate cut of 150bps or more.
- Our base case sees headline inflation averaging 10.3%YoY in the next four months (incl. Mar’20), with the monthly reading declining to 9.6%YoY by Jun’20. For Mar’20, we estimate headline inflation to clock in at 10.88%YoY vs. 12.40% in Feb’20 and 8.60%YoY in Mar’19. The expected decline in inflation comes from i) high base effect, ii) declining food prices and iii) lower gov’t administered fuel prices.
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