Monetary Tightening Has Worked

Private sector credit growth has slowed to historically low levels, falling to around 6%. The gap between the private sector credit growth and nominal GDP growth rate is now the narrowest in 30 years. This is not accidental. It reflects an extended phase of contractionary monetary policy aimed at curbing inflation. It also reflects weak loan demand and heightened risk aversion among the banks.

Yet the reported inflation remains elevated. With credit expansion choked and investment stagnant, inflation can no longer be credibly described just as a monetary phenomenon. If the reported inflation figures are indeed accurate, they point to non-monetary forces such as supply-side rigidities and tax compliance by the businesses. Under these conditions, maintaining a tight monetary stance risks further suppressing growth without materially addressing inflation.

Therefore, we think now is the time to start monetary easing.