KARACHI, March 21: Monetary growth took a sharp jump of 2.5 per cent in just 15 days and crossed even the last year rate of growth building up the inflationary pressure and threatening the tight monetary policy of the SBP.

The SBP data issued on Wednesday showed that the monetary growth (M2), a major factor behind inflation, increased by 10.25 per cent during July-March 10, 2007. The sudden increase added Rs350 billion into the system.

The July-Feb figures showed that the monetary growth was lower than the previous year and remained at 7.72 per cent during the eight months.

The addition of huge supply of money into the system is bound to further increase the inflation, already in the range of average 8 per cent.

The currency supply also witnessed a sharp increase of 2.9 per cent in just 15 days and added Rs21.5 billion to circulate a total Rs118.2 billion into the system since July to March 10.

The currency supply rose from 13.07 per cent to 15.97 per cent during the last couple of weeks.

“Despite the tight monetary policy, sharp increase in currency supply will certainly hit the inflation high allowing it to go far beyond the annual target of 6.5 per cent,” said an analyst.

Bankers fear that high inflation would also affect the interest rate, which they believe, has hit the peak.

“To curtail inflation further increase in interest rate will create another kind of inflation as the cost of borrowing would rise and increase the prices,” said a banker.

Bankers said that the inflation had already curtailed the credit growth to the private sector and any move to further reduce the credit supply would bounce back in the form of lower economic growth.

Credit to the private sector fell to Rs239.9 billion compared to Rs325.6 billion supplied during the period from July to March 10.

They held the government responsible for failing to assert its authority to curtail the influence of hoarders, who played a major role in the price hike of commodities and disrupting the supply and demand system.

They said that the government’s borrowing from the banking system was another major factor causing inflationary pressure on the economy.

The government’s borrowing reached Rs125.8 billion in just eight months and ten days while the annual target is Rs120 billion. This excess spending is inflationary, said the banker.

However, analysts said that the SBP was equally responsible as it reduced the credit supply to the private sector but failed to control the rising money supply.

“The direct impact of higher supply of money is the devaluation of money, which means lessening of purchasing power of rupee and this could lead to a higher interest rate in the coming days,” said the analyst.

“If the inflation rises to above 9 per cent then we will be heading towards ‘stagflation’ which means a combination of inflation and poor economic growth,” he said.