KARACHI, June 23: Pakistan may have to tighten monetary policy to fight rising inflation, but this will be done in a "measured" way to avoid a sharp rise in interest rates, said Ishrat Husain, Governor of the State Bank.
"Our response will be very measured. We will watch the situation and try to take action in the light of the evidence which accumulates over time. We are not going to go into a knee-jerk reaction," Mr Husain told Dow Jones Newswires in an interview late Tuesday.
Mr Husain said the central bank's monetary policy is aimed at ensuring cheaper credit to the private sector to fuel economic growth while at the same time seeking to contain inflation.
"This is a balancing act whereby you don't want to choke off the private sector credit growth, which is translating into higher manufacturing and services sector growth," he said.
"Second is that any central bank is very averse to inflation. If inflation is being induced by the monetary policy stimulus then we have to take action in one direction i.e. tightening of the monetary policy."
He said the central bank's broader policy targets positive real interest rates - or interest rates that have already taken into account inflation. The government is targeting economic growth of 6.4 per cent in the current fiscal year, its most ambitious goal in eight years.
It has set an even higher target for the fiscal year 2004-05, forecasting growth of 6.6pc. The SBP chief said that although core CPI is still under control at 3.4pc for 11 months, the central bank must be vigilant because the headline inflation number has topped the government's target.
"Core inflation is at 3.4pc. From a monetary policy perspective it is under control, but you cannot ignore headline inflation because the market expectations (are linked to) headline inflation and not core inflation," he said.
Mr Husain said inflation is likely to hit 4.5pc-4.6pc in the current fiscal year and rise to five per cent in the next fiscal year. He said the recent sharp spike in inflation was caused by higher food prices driven by shortage of wheat stocks.
"The downside is that because the government did not have enough stocks at the time of lean months. The private sector was hoarding their purchases in order to get higher prices from the consumers while interest rates were quite low," he said.
Mr Husain said the central bank had decided to increase short-term lending rates for the private sector to arrest food hoarding, but he said more administrative measures were needed to check food prices.
