WASHINGTON, Oct 2: Pakistan's central bank on Friday said inflation pressures aren't sufficiently strong to warrant a more aggressive approach to monetary tightening.

Still, State Bank Governor Ishrat Husain said interest rates would continue to be increased in a "measured" fashion to damp rising prices as outlined in its semi-annual policy statement issued July.

"Interest rates have been going up for the last several months, but there are a lot of people who want a more aggressive increase in the interest rates," he said in an interview with Dow Jones Newswires.

"The bank's position is there is no evidence so far that suggests we should be more aggressive in interest rate rises," he said, ahead of annual meetings this weekend of the International Monetary Fund and World Bank.

Husain said "slow, gradual increases" have been implemented and "will continue to happen as the evidence on the (economic) variables comes in." "Otherwise economic growth is going to be choked off, and unemployment is also a major issue," he said.

Pakistan's central bank has been raising benchmark treasury bill yields since July, when it warned it would tighten monetary policy in the first half of the fiscal year that began July 1 to check rising prices and to stabilize the exchange rate.

Consumer price inflation, which hit a six-year high in July at 9.33pc, has been a major threat to the country's nascent economic recovery. Analysts say inflation could reach 6pc-7pc this fiscal year, higher than the government's 5pc forecast.

When asked whether consumer price inflation would exceed this year's forecast, Husain declined to comment. "We will change the (inflation) target in the next monetary policy statement to be issued in January 2005," he said.

While headline inflation has risen due to high oil prices and food price increases, Husain said the rate of change slowed in August as the government moved to import one million tons of wheat to meet shortfall.

Still, core consumer price inflation, which excludes volatile items such as food and energy prices, hasn't gone up so much, he said.

Notwithstanding the prospect of further monetary tightening and the effect of water shortages on agriculture, the central banker said the economy is on track to meet a government growth forecast for this fiscal year. Pakistan's gross domestic product growth reached 6.4pc in the year ended June 30, compared with 5.1pc a year earlier.

The government is targeting GDP growth of 6.6pc in the current fiscal year.

"Agriculture growth last year was only 2.4pc, but despite this we were able to obtain 6.4pc overall growth, meaning it was the services and manufacturing sectors that were the main drivers of the growth last year," Husain said. "And they will continue to be the main drivers of growth and we will be able to attain around 6.5pc," he added.

He said the main risk for the economy is terrorism, which could discourage foreign investment.

When asked about a planned Islamic bond issue, the central bank chief declined to talk about the specifics of the prospective issuance, but said a decision on its size and timing will be made in the next few months. "We are still in the process of getting proposals, presentations, we are doing soft marketing and then we will decide when we will enter the market, what size and what kind of market segment we will be focusing on," Husain said.

Pakistan is looking to follow up February's $500 million Eurobond with an Islamic bond offering that will appeal to cash-rich Middle Eastern investors looking for a Sharia-compliant home for their cash.

Islamic bonds adhere to Islamic principles that ban the payment of riba, or interest, which is considered usury. As such, most Islamic bonds are based on sale-and-lease-back structures that create a partnership rather than a seller-buyer arrangement.

Citigroup Inc. (C) and HSBC (HBC) are reckoned to have a good shot at winning the Pakistan mandate, given they have been prominent in previous Islamic issues. But the dozen banks giving presentations will also be pitching hard to grab a piece of what looks to be a lucrative Islamic pie.