SBP raises policy rate to 14pc to check inflation

Image via Wikipedia

* Bank says inflation persists because of govt borrowing 

* Decides to implement revised limits on borrowings of provinces from SBP

Daily Times - Staff Report

KARACHI: The State Bank of Pakistan on Monday raised its discount rate by 50 basis points to 14 percent with effect from November 30 (today). 

The decision was taken at a meeting of the Central Board of Directors of the State Bank of Pakistan held under the chairmanship of SBP Governor Shahid H Kardar in Lahore.

“The SBP’s efforts to counterbalance the rapid expansion in reserve money and arrest the rising inflation expectations would require an increase in the policy rate,” the bank said in its monetary policy decision while explaining the rationale behind the increase in policy rate. 

It said that inflation was rising and persisted because of relentless government borrowing from the SBP. The rising Net Domestic Assets to Net Foreign Assets ratio of the SBP balance sheet and its strong association with the Consumer Point Index inflation also suggested that inflation was likely to persist at double-digit levels during much of FY11 and possibly in FY12.

Revised limits: A principled decision was also taken by the board to strictly implement the revised limits on borrowings of the provinces from the SBP, even if it involved stopping payments to the provincial governments, “The SBP believes that the entire responsibility of tackling macroeconomic problems has been unfairly placed on monetary policy only. The SBP also understands that the burden of this monetary tightening is being borne largely by the private sector, as it gets crowded by the excesses of government borrowing for budgetary purposes and commodity operations, with all its adverse implications for sustainable economic growth,” according to the monetary policy decision.

“The economy’s ability to achieve sustainable recovery remains constrained owing to slow progress in the prevailing security and economic conditions. The key economic variables impeding stabilisation and thereby growth are high and persistent inflation, continuing fiscal slippages and unresolved power sector issues,” it added.