The Monetary Policy Committee (MPC) has left the policy rate unchanged at 6.5%. This is the tenth consecutive time the MPC has left interest rates unchanged since it last raised them in February 2023. Monetary policy’s stance, however, has been changed from the withdrawal of accommodation to neutral in the latest meeting. This is the first change in policy stance since June 2022. Both these decisions are on expected lines and most analysts believe that the MPC will begin bringing down interest rates from its December meeting.
But would it not have been better to cut interest rates in October itself?
The MPC itself has noted that the economy is in a good place as far as growth-inflation balance is concerned. The former is robust and the latter seems to be finally aligning with the 4% target. Annual projections for both growth (7.2%) and inflation (4.5%) have not changed between the August and October meetings of the MPC. Also, the reason why the inflation is still high is food prices, which has very little to do with monetary policy. The positive rhetoric about growth notwithstanding, it would be wrong to argue that interest rates that have been high for long have not hurt growth on both consumer and investment fronts.
The key question then is whether the MPC’s staggered pivot — first stance, then rates — is unnecessarily risk-averse behaviour. This newspaper would have argued on these lines even a month ago. But geopolitical and hence economic waters have become significantly muddier in the last few weeks because of the escalation of hostilities in West Asia. Brent crude prices have surged from $70 per to $80 per barrel in the last month or so and continue to be volatile. The presidential election results in the US, especially if Donald Trump manages to take the White House once again, could notch up the policy uncertainty dial even more. Hopefully, the MPC will have more clarity about both these questions when it meets next in December and this is reason enough to make a symbolic pivot rather than cut rates and change policy stance together.
{{/usCountry}}The key question then is whether the MPC’s staggered pivot — first stance, then rates — is unnecessarily risk-averse behaviour. This newspaper would have argued on these lines even a month ago. But geopolitical and hence economic waters have become significantly muddier in the last few weeks because of the escalation of hostilities in West Asia. Brent crude prices have surged from $70 per to $80 per barrel in the last month or so and continue to be volatile. The presidential election results in the US, especially if Donald Trump manages to take the White House once again, could notch up the policy uncertainty dial even more. Hopefully, the MPC will have more clarity about both these questions when it meets next in December and this is reason enough to make a symbolic pivot rather than cut rates and change policy stance together.
{{/usCountry}}To be sure, this temporary rationale does nothing to do away with the more fundamental dilemma facing the larger economic policy environment: Are high interest rates justified when inflation is being driven by food prices?