KARACHI, Aug 13: The State Bank will show no hurry in raising interest rates despite the fact that CPI inflation has touched a high mark of 9.33 per cent in the very first month of this fiscal year.

"We will show no hurry at all...our response will be cautious and we may rather go for gradual tightening of monetary policy," said a senior State Bank official. The official who declined to be named was reached by Dawn to learn how the central bank would respond in terms of interest rate hiking to soaring inflation.

"We will continue monitoring core inflation very closely and our response would be measured and gradual," the official said. Measured and gradual are the words SBP Governor Dr. Ishrat Husain has used quite frequently in recent statements on the possibility of interest rates hiking to contain inflation.

The SBP began a gradual tightening of monetary policy in the last quarter of fiscal year July-June 2003-04. It indicated in its monetary policy statement for the first half of this fiscal year that it would follow the same course during July-December 2004.

But as consumer inflation or inflation measured by Consumer Price index shot up to 9.33 per cent in July 2004 over July 2003 the financial market particularly banks felt that the SBP might accelerate the process of interest rate hiking.

More than half a dozen senior executives of both local as well as foreign banks reached by Dawn said they were expecting that the SBP would accelerate interest rate hiking to keep inflation in check.

The discount rate which traditionally served as the anchor of the SBP monetary policy has remained unchanged at 7.5 per cent since November 2002 and the SBP has used treasury bills yields instead to signal a gradual tightening of monetary policy. Bankers say the SBP will now have to raise TBs yields faster than in the recent past to keep inflation in check since the beginning of the new fiscal year.

Consumer inflation or inflation measured by Consumer Price Index shot up by 9.33 per cent in July 2004 over July 2003 giving a crude reality check to economic managers. Worse than that SPI inflation or inflation measured by Sensitive Price Index shot up by 13.84 per cent.

Since it reflects the change in the prices of most essential items of daily use an alarmingly high SPI inflation means that it is becoming too expensive for people just to survive.

A 13.84 per cent SPI inflation means that in July 2004 people had to pay Rs11,384 to buy most essential goods and services that they used to purchase for Rs10,000 in July 2003.

In other words it means that the actual worth of Rs10,000 in July 2003 fell to Rs8616 in July 2004 for those who used it for buying essential commodities and services. Though central bankers view with concern the rising inflation measured through CPI and SPI it is the core inflation which matters most when they go for dampening inflationary expectation. Core inflation is generally defined as CPI inflation minus food and fuel inflation - the areas on which the monetary policy has a little impact.

But this alone is not the only definition and central banks may at times use different indicators of core inflation. It is not clear what indicator of core inflation is used by the SBP. But its officials say the sectors wherein price movements are high due to increased demand gives a natural indicator for core inflation from a central bank's point of view.

Data released by the Federal Bureau of statistics show that whereas general CPI inflation was at 9.33pc year-on-year last month food inflation was at 14.93pc and non-food inflation at just 5.68pc. FBS does not provide data on non-fuel inflation.

If non-food inflation of 5.68pc is taken as a rough indicator of core inflation it indicates that meeting the general CPI inflation target of 5pc in this fiscal year would be too difficult.

"Keeping CPI inflation in a single digit during this fiscal year seems too difficult," says a noted economist Dr Javed Akbar Ansari. "The SBP has been gradually liberalising the capital account; imports are growing fast; there is little hope of food prices stabilizing because of delayed response of the government; crude oil prices have hit record highs and may continue to rise - and the rupee is depreciating.

In addition to this SBP seems to have little control over the growth in different components of money supply - it only manages aggregate monetary assets to some extent." "All this indicates that we may have to see a double digit inflation during this fiscal year."

But SBP officials say there is no question of inflation rising to double digit though they do not rule out the possibility that it may rise beyond five percent. "Food prices are going to stabilize once we import wheat and oil prices may start easing after some time," said a senior central banker.