KARACHI, Jan 21: Rising core inflation may push the discount rate higher threatening the viability of current tight monetary policy, market experts said on Monday.

Most of banking and money market experts said that the discount rate might be enhanced by 50 to 100 basis points to check the rising inflationary trends which had pushed up even the core inflation (non-food non-energy).

The core inflation remained low over the past two years. However, it reached 7.2 per cent in December against 6 per cent in July 2007.

The State Bank of Pakistan will announce its new monetary policy on January 31.

“Many indicators, including the rising core inflation, showed that the discount rate may be increased by 50 to 100 basis points,” said Mohammad Imran, head of research at First Capital Equities Ltd.

The SBP has been defending its tight monetary policy as the core inflation remained lower over the past couple of years and it has blamed the food inflation for higher inflation or Consumer Price Index (CPI).

The CPI rose to 8.8 per cent in December from 6.4 per cent in July against 6.5 per cent target set for 2007-08. The food inflation rose to 12.2 per cent from 8.5 per cent in July showing its influence on the CPI basket.

The experts also pointed out towards the narrowing gap between treasury bills and discount rate. They said this would force further increase in the discount rate.

“The SBP has been gradually increasing rates of T-bills narrowing the gap with discount rate. This could be a strategy to slightly push up discount rate to create gap of at least 100 basis points,” said Syed Shahid Iqbal, Director, Capital Market at Live Securities.

The one-year T-bill rate is about 9.5 per cent while the benchmark 6-month rate has reached 9.3 per cent. Money market dealers said the discount rate could be increased up to 50 basis points and they found the gap between the two rates as a valid reason for raising the discount rate.

However, a foreign banker said the further increase in the discount rate would not bring any change in the current monetary behaviour of the market and the inflation would continue the same trend.

“The SBP has achieved its target of curtailing the monetary expansion through lower credit supply to the market and it was the government which borrowed heavily causing monetary expansion which had resulted in higher inflation,” said the banker.

He said the further tightening would only increase the cost of borrowing which might not be helpful for the growth of economy.