High interest rates to stay with monetary tightening written as sole cure

F.P. Report

LAHORE: Caretaker Finance Minister Shamshad Akhtar has reportedly assured the International Monetary (IMF) of stay committed to the stand-by arrangement and execute the policy actions agreed with the world’s top lender.

As far as the people are concerned, it means more inflation as Pakistan will with continue with energy sector “reforms” – hike in the power and gas tariffs as well as in petroleum prices.

Moreover, there would be more of monetary tightening – either increase in the interest rate or maintaining the current level.

US FED, ECB AREN’T CHANGING

This promise comes when US Fed Chair Jerome Powell and European Central Bank President Christine Lagarde made it clear that there will be no change to central bankers’ shared objective of getting inflation back down to 2pc and the current monetary policy is to be sustained.

In simple words, just forget about rate cuts any time soon and don’t rule out the possibility of further hikes.

“Two per cent is and will remain our inflation target,” Powell said. “We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time,” Reuters quoted him as saying.

When asked about the idea of “moving the goalposts”, Lagarde said, “We are playing a game; there are rules; don’t change the rules of the game halfway through – I’m not saying that we are halfway through, probably a bit more than that.”

Both Powell and Lagarde have thus not only reiterated the view of the world’s top central banks but also of international financial institutions that rate hikes are the only way to reduce inflation as suggested to and imposed on by the IMF as policy matter.

EFFECTS ARE KNOWN

But is this policy the sole panacea for the countries like Pakistan? Doesn’t seem to be the case. With the record-high inflation and interest rate as well as energy prices are taking its toll on the national economy in the shape of less electricity demand [just like petrol and diesel], as the Power Division earlier this week backtracked from its initial request to raise electricity tariff by Rs5.40 per unit and suggested a smaller raise of Rs3.55 in terms of quarterly tariff adjustment (QTA).

It is a wakeup call for those advocating to follow the IMF policies religiously as the devastating impacts are already visible.

NO INNOVATION

Meanwhile, there is another related news. According to Reuters, a research presented on Friday at a Federal Reserve economic symposium says central bank efforts to slow inflation, by raising borrowing costs and cooling demand for goods and services, may also undermine investments in innovative technologies that could make the economy stronger in the long-run.

Yueran Ma, an economist at the University of Chicago Booth School of Business, and Kaspar Zimmermann, an economist at Germany’s Leibniz Institute for Financial Research SAFE, found that an unanticipated 1-percentage-point tightening of monetary policy cut company research and development spending by up to 3pc, reduced venture capital spending by an even deeper 25pc, and reduced patents in what were considered “important” technologies by 9pc.

After five years, overall economic output was about 1pc lower than it would have been, a finding they regard as evidence of how a central bank’s focus on curbing inflation in the short-run “could have a persistent influence on the productive capacity of the economy.”

Their paper was presented at the US central bank’s annual conference in Jackson Hole, Wyoming, the same event where Powell and Lagarde had spoken.

Reuters notes that Economists and central bankers usually regard monetary policy as a short-term tool used to stabilize output and inflation, with loose financial conditions when an economy is faltering and higher borrowing costs when prices begin to accelerate.

After reading all this, one wonders when will the bosses central bank and international financial institutions will try to unlearn so that they are able to learn after relearning.