Thread by @MOPasha84

Real interest rates 🧵

So apparently people believe that positive real rates in 🇵🇰 will ⬇️ currency in circulation (CIC) & ⬆️ deposits.

This means ⬇️ consumption/⬆️ savings & voila the inflation bogeyman will be vanquished back to his hellhole.

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#PakistanEconomicCrisis

On this basis they prescribe that rates should be jacked up to achieve positive real interest rates (RIR).

Unfortunately the data indicates otherwise and why I believe increasing interest rates at this time will be counterproductive when it comes to slowing inflation.

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Exhibit 1:

Between FY13 & FY20, Pakistan maintained on average positive real rates of 2.5%. During that time average CIC as a % of total money supply increased from 23.5% to 30.0%. Conversely banking deposits dropped from 76.4% to 69.8%.

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Funnily enough over the past 2.5+ years when we have had negative real rates (post covid) both CIC and deposits have started to move back in the desirable direction.

What does this tell us?

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Not that negative real rates are a good policy option but that higher real rates have not incentivised documented savings (at least historically).

At this point in time, tightening policy further is not the answer to inflation or macroeconomic stability.

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Consumer discretionary demand has already cratered as is evident from high frequency indicators.

And the cash/undocumented economy does not materially respond to rate hikes.

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Rather focus on continued fiscal adjustments, increasing revenue (by taxing trade, agri, real estate) ending pointless subsidies/tariffs & privatising SOEs.

Productivity is the answer, not breaking people to the point where they have to forgo feeding their families.

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