News
Thursday, September 30, 2010
SBP moves to contain inflation
* Bank increases key policy rate from 13 to 13.5 percent
* Says impact of continued inflation substantial, being felt by entire economy
KARACHI: The State Bank of Pakistan (SBP) has decided to raise its policy rate by 50 basis points to 13.5 percent with effect from September 30 (today). This will be the second hike on discount rates in the current fiscal year.
This was decided by the Central Board of Directors of the State Bank in a meeting held under the chairmanship of SBP Governor Shahid H Kardar on Wednesday.
“The monetary policy stance is formed by the consideration that the impact of continued inflation is substantial and felt by the entire economy. A tightening of the stance is thus called for in full recognition that the difficulty to contain fiscal deficit has resulted in the private sector bearing the full brunt of such an adjustment,” the SBP issued its explained rationale behind the increase in policy rate in its monetary policy decision.
Floods: The recent catastrophic floods have had serious implications for macroeconomic stability and growth prospects. However, even before the floods, the macroeconomic conditions and outlook looked fragile.
By the end of 2009-10, inflation was high and the fiscal deficit had risen to 6.3 percent of the gross domestic product. Early assessments indicated that these pressures were unlikely to abate in 2010-11.
Post-flood projections raised legitimate concerns about worsening of the macroeconomic balances since the initiatives required to address the underlying cause for the primary stimulus to aggregate demand, coming from the fiscal side, have yet to be launched with vigour and coherence.
Inflation will increase further accompanied by a drop in economic growth, both the trade balance and fiscal accounts will be under stress, and the banking system may witness pressure on account of rise in Non Performing Loans of the private sector and borrowings of the government, unless a comprehensive and coordinated response is developed to meet these challenges.
Govt borrowing: The clarity on the nature and scale of such a package would depend on the complete assessment of losses to the economy, expected to be completed in October. Nevertheless, components of the economic strategy that would need to continue to be in focus despite uncertainty would include implementation of tax reforms to enhance much needed revenues, resolution of the energy sector subsidies and circular debt to restore economic growth, relief measures for flood affectees, and containment of government borrowing from the SBP to restrict inflation. staff report/app
Courtesy www.dailytimes.com.pk