KARACHI, July 29: The State Bank on Saturday raised the benchmark discount rate by 50 basis points to 9.5 per cent. It was the second major step indicating the direction of the central bank’s policy thrust after it increased the ceiling of banks’ reserve requirement with the SBP.

This was announced by SBP Governor Dr Shamshad Akhtar while delineating the central bank’s monetary policy for July-December 2006.

Expressing the confidence that the rate increase would enable the central bank to control inflation, Dr Akhtar said that the rate had been increased after analysing market demand and prevailing monetary situation which, she said, was enough to keep inflation at 6.5 per cent during 2006-07.

The increase in discount rate marked a shift from the central bank’s traditions as in April 2005, the SBP had raised the rate by 1.5 per cent, bringing it to 9 per cent.

Normally, central banks around the world changed discount rate by small increments. Analysts believe that the SBP may further increase the discount rate after six months or so to control inflation.

The SBP had already tightened monetary policy by increasing cash reserve requirement (CRR) and statutory liquidity requirement (SLR) collectively by 5 per cent to a total of 25 per cent.

Dr Akhtar said that a higher interest rate would not hurt economic growth and the seven per cent GDP growth would be achievable. She said that the banks have been sensitised through recent change in cash CRR and SLR to improve returns to depositors and tighten their internal control system while managing their exposures effectively.

The governor said that the balance of risk had tilted towards managing domestic and external imbalances effectively and curbing inflationary pressure.