Question

How would you term the action taken by the MPC as far as the monetary policy rate (MPR) is concerned.

Answer 1

You didn't specify the name of the country, whose monetary planning committee you are talking about. So I am providing you an example of India.

As this Monetary Policy Report (MPR) goes for release, the global macroeconomic outlook is overcast with the COVID-19 pandemic. With over 12 lakh confirmed infections and over 67,000 deaths across 211 countries as of April 7, 2020 and counting, the sheer scale and speed of the unfolding human tragedy is overwhelming. The disruption of economic activity in a wide swathe of affected countries is set to intensify in the face of headwinds in the form of massive dislocations in global production, supply chains, trade and tourism. Global output is now seen as contracting in 2020. Financial markets across the world are experiencing extreme volatility: equity markets recorded sharp sell-offs, with volatility touching levels seen during the global financial crisis; flights to safety have taken down sovereign bond yields to record lows; risk spreads have widened; and financial conditions have tightened. Global commodity prices, especially of crude oil, have also declined sharply in anticipation of weakening global demand on the one hand, and the failed negotiations of the Organisation of the Petroleum Exporting Countries (OPEC) and Russia, on the other.

Many central banks have eased monetary, liquidity and regulatory policies to support domestic demand, including through emergency off-cycle meetings. Bilateral swap lines between some central banks that were deployed during the global financial crisis have been activated. G7 finance ministers and central bank governors have stated that they stand ready to cooperate further on timely and effective measures. G20 finance ministers and central bank governors have committed to use all available policy tools to deal with COVID-19. G20 Leaders have resolved to do whatever it takes to overcome the pandemic. The International Monetary Fund (IMF) and the World Bank Group are making available US$ 50 billion and US$ 14 billion, respectively, through various financing facilities to their membership to help them respond to the crisis.

Turning to the domestic economy, India has not been spared from the exponential spread of COVID-19 and by April 7, more than 4,700 cases had been reported. While efforts are being mounted on a war footing to arrest its spread, COVID-19 would impact economic activity in India directly through domestic lockdown. Second round effects would operate through a severe slowdown in global trade and growth. More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets. These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1:2018-19 and continued through H2:2019-20. Meanwhile, headline inflation stayed above the upper tolerance band of the inflation target band during December 2019-February 2020, led by a spike in vegetable prices. While it has peaked and vegetable prices are on the ebb, the impact of COVID-19 on inflation is ambiguous relative to that on growth, with a possible decline in prices of food items being offset by potential cost-push increases in prices of non-food items due to supply disruptions.

Monetary Policy Committee: October 2019-March 2020

During October 2019-March 2020, the monetary policy committee (MPC) met four times. The meeting scheduled for March 31, April 1 and 3, 2020 was advanced to March 24, 26 and 27, 2020. In its October 2019 meeting, the MPC had noted that the continuing slowdown warranted intensified efforts to restore the growth momentum. With inflation expected to remain below target in the remaining period of 2019-20 and Q1:2020-21, the MPC took the view that policy space could be used to address growth concerns within the flexible inflation targeting mandate. Accordingly, it voted to reduce the policy repo rate by 25 basis points (bps) to 5.15 per cent (5 members voted for a reduction of 25 bps and one member voted for a reduction of 40 bps), and committed to continue with an accommodative stance as long as necessary to revive growth, while ensuring that inflation remained within the target.

The MPC decided to hold the policy rate unchanged in its December 2019 and February 2020 meetings. While domestic demand conditions weakened further in the run-up to these meetings, inflation rose sharply and breached the upper tolerance level of the mandated inflation band in November and December 2019. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo, although it voted to persevere with the accommodative stance as long as necessary to revive growth, given the space available for future policy action.

In its off-cycle meeting in March, the MPC noted that macroeconomic risks brought on by the pandemic could be severe, both on the demand and supply sides, and stressed upon the need to do whatever is necessary to shield the domestic economy from the pandemic. The MPC reduced the policy repo rate by 75 bps to 4.4 per cent (4 members voted for a reduction of 75 bps and 2 members voted for a reduction of 50 bps). During February-March 2020, the Reserve Bank of India (RBI) also undertook several measures to further improve liquidity, monetary transmission and credit flows to the economy, and provide relief on debt servicing.