No hike, yet again
The central bank screams it is no time to get complacent but the federal finance machine would certainly be all smiles right about now. Because that same SBP, which regulates the money supply in the country has decided, again, not to hike the interest rates. The reason: its analysts feel the government has been able to, more or less, keep inflation in check.
This mildly positive assessment should not be interpreted as a victory lest the government make Richard Nixons 1972 economic faux pas when he proudly claimed that the rate of increase in inflation was decreasing. Amused by the use of this arcane, twice removed theoretical construct, mathematician Hugo Rossi remarked, This was the first time a sitting President used the third derivative to advance his case for re-election. The SBP only maintains that the government was effective in the period in question; the fragility of the macroeconomic framework remains. In fact, the global price shocks that will follow the crisis in the oil-rich Middle East and North Africa, coupled with the Japanese earthquake and tsunami, are expected to hurt. In addition, though the government has shown significant restraint in borrowing from the central bank, the practice is going to continue only if solid steps are taken on the revenue front. The State Bank correctly assesses those developments to be contingent on an across-the-board political consensus on issues like the reform of the GST, the transparent rationalisation of subsidies (read: get rid of them) and a well-thought out debt management program.
There is a real economy. And then there is a perceived economy. Governments deal in the former and the media deals in the latter. Governments often get it wrong but the mainstream media doesnt have a shot in hell of ever getting it right. With the bad comes the good. True, times are tough for the urban middle-class but the rising prices of food items have translated into a measure of prosperity in the peripheries. True, the TV anchors might bemoan the plight of our exporters, but we have one of the lowest trade deficits in recent times. And, now, though the media might claim things are getting worse on the inflation front, the charts seem to be showing something else. No time, again, for the government to get complacent. But time for it to be cut some slack.