KARACHI, Jan 19: The State Bank on Monday made a guarded statement on its monetary policy stance leaving room for a swift reversal of the easy policy stance - if the market conditions so require. But it makes no secret of the fact that the interest rates have seemingly levelled off.

Says the much-awaited policy statement: "The balance of risks perceived as at this stage favours the State Bank of Pakistan to continue maintaining current monetary conditions."

"But it will modulate swift policy changes if the inflation accelerates in the coming months or if the differentials with international interest rates widen significantly."

The SBP has been following an easy monetary policy stance since June 2001 to kick-start economic recovery, and in November 2002, it reinforced this stance by slashing its discount rate by one-and-a-half percentage points to 7.5 per cent.

The statement that the SBP has made after the mid-year review of monetary and credit developments is supposed to guide the financial markets on its monetary policy stance in January-June this year.

The statement was released after the approval of the SBP Board of Directors that met the same day in Gujranwala. SBP Deputy Governor Dr R.A. Chughtai chaired the meeting in the absence of Governor Dr Ishrat Husain, SBP sources told Dawn.

The statement has come at a time when the financial market was desperately looking for clues about the possible direction of interest rate movements. But the cautiously-phrased statement hardly offers any that the market can rely on without developing an insight of their own into monetary developments.

"Interest rates have begun to inch up after bottoming out at historically low levels," says the statement. "At their current levels they are still on the lower side and are not expected to disturb the investment plans of the private sector."

The report says that the broad money growth during the first six months is less than the target. "But there is a possibility that it may surpass the end-year growth target of 11 per cent in the wake of ongoing momentous credit expansion in the private sector," warns the report. What else points to this possibility is an unusual rise in the currency in circulation.

Analysis of SBP data shows that the currency in circulation (CiC) expanded by Rs82.8 billion or 16.7 per cent between July 1 and December 27, 2003. This increase in CiC accounted for 49 per cent of the Rs168.7 billion expansion in broad money or M2.

The unusual growth in CiC coupled with a dramatic rise in private sector credit in the first half of this fiscal year had an impact on price line. Consumer inflation measured by Consumer Price Index began to inch up. "It is steadily rising since August 2003 and has accelerated to 3.08 per cent by the end of December 2003." The private sector credit offtake totalled Rs156.8 billion between July 1 and December 27, 2003 against the full fiscal year target of Rs85 billion.

Commenting on the interest rate environment the policy statement says: "The most recent data on yields on government papers and lending rates appears to support the view that interest rates have largely levelled off."

This is also evident from an upward shift in the yield curve between August and December 2003. Since August 2003, the cut-off yields on three-month; six-month and one-year T-bills has risen by 39 basis points, 45bps and 57bps, respectively.

"The principal factor that pushed up the interest rates appears to be the less-than-comfortable liquidity position of commercial banks due to exceptionally high level of bank lending to the private sector together with relatively low level of monetary injection from the central bank."

Senior bankers say though the phrasing of SBP monetary policy statement is well-guarded it does indicate that the central bank would not mind changing its easy monetary policy stance in January-June 2003. "Take for example the statement they (the SBP) have made on the interest rates levelling off and on the need to change the stance if inflation accelerates," said treasurer of a foreign bank.

Commenting on inflation, the statement says that the recent surge in inflation "does not seem to be the outcome of higher money supply." "Rather it has occurred due to seasonal price increases as well as increase in the price of some food items, especially wheat flour, meat and vegetables."

The statement takes note of the rising world oil prices, but it says that "their impact should be limited in view of stronger rupee." The statement says that inflation rate during the remaining part of the fiscal year "is not expected to pose a major threat."

"It may edge up within the narrow bands but not deviate much from the annual target of four per cent." But keeping inflation around this level would be challenging - if not impossible due to the rising trend in currency in circulation and booming oil prices.

"Pro-active monetary management, fiscal discipline and stability in exchange rates will be used to dampen the inflationary expectations," says the SBP policy statement.