STATE BANK OF PAKISTAN MUST FOLLOW THE US FED.

Byline: SHABBIR H. KAZMI

Federal Reserve of United States has cut rate in an emergency that has created opportunity for other central banks around the globe to cut rate, especially for those who held off so far out due to domestic and external concerns. It is expected that State Bank of Pakistan (SBP) will also follow the suite. However, many analysts expect the SBP to and opt for status quo in the upcoming monetary policy announcement. There are indications that inflation rate is easing in Pakistan, many attribute this to high base effect, delay in utility rate adjustments and price normalization in certain food categories rather than genuine price declines across the basket. It is also feared that if the central bank opt for cut in policy rate, Pakistan may experience reversal in the influx of 'hot money'. There are ample evidences that the reversal has already started.

According to some analysts, Pakistan being less integrated with the global supply chains has historically remained largely insulated from the impact of 'black swans'. Given limited financial integration with the globe, the country's monetary policy setting has also remained more inward looking, dominated by domestic factors (inflation and domestic growth). Even in last two major instances (Dot-com bubble and Subprime mortgage crisis), when Fed opted for emergency rate cuts and subsequently EM/FM central banks went on an easing spree, Pakistan either maintained or hiked interest rates catering to the domestic need for tightening monetary policy. They also highlight that the comparison with the past may not hold now, since the situation has changed.

If history is any guide, an emergency rate cut by the US Federal Reserve generally triggers policy response from other central banks across the world, albeit the response varies in proportionality depending on domestic factors and impact of the event on a certain country.

The policy response from the central banks is relatively quick and larger in scale when the economic repercussions of the event are more global. A review of 2007-08 financial crisis indicates that emerging market central banks kepttheir monetary firepower unused until the late 2008, when the severity increased and its impact started spilling over to global markets despite Fed being in action since late 2007, (Fed had cumulatively slashed interest rate by 425bps in a year).

The same is true in case of the Fed's emergency rate cuts in the wake of the tech bubble...