Growth in times of (no) inflation

MONETARY POLICY TRAJECTORY APPEARS TO BE ENTERING A PHASE OF PAUSE WITH NEUTRAL STANCE

- SOUMYA KANTI GHOSH

XTRAORDINARY TIMES OFTEN demand out-of-the-box responses, even if the ensuing results can remain chained to the vagaries of serendipity.

In the early 1970s, UK’s Chancellor of the Exchequer Anthony Barber made a “dash for growth” that involved easy terms of credit in lockstep with monetary easing and massive tax cuts, abandoning fixed exchange rates that saw the sterling slump around 15% over the next 18 months. In March 1973, the interest rates were slashed by a massive 75 basis points (bps) (8.5 to 7.75) even with the GDP clocking 12.5%, The railroad, however, fizzled as an unanticipated oil shock triggered inflation to skyrocket and a miners’ strike reversed the process.

Bank Indonesia (BI), during June 1995 to March 1997, cut the key BI rate five times even when the GDP was looking quite robust. Caught on the wrong foot in the Asian crisis, growth pummelled to a record low of -13% in 1998.

In present terms, the closest India can think of cutting rates in a benign inflationary rate regime, even when growth is high, would be China’s easing of rate by 25 bps in mid-2015 when inflation was marked decisively low at 1.4% (though the GDP data came days after the rate decision) and its own playbook stretching from June 2015 to September 2016, when policy rates were cut by 25, 50 and 25 bps with inflation remaining within the framework (5.40-4.20%).