Critics say that the latest Monetary Policy Statement issued by the State Bank gave out too much and risked speculation in the local exchange market. However, bankers strongly support the State Bank's move to help the market take informed decision on the basis of latest and updated economic trends. But this is just the reverse of what the US Fed does.

Before the quarter per cent raise in US rate for the second time in recent months, economists/bankers blamed the Fed for not being transparent and criticised its Chairman Alan Green span for being ambiguous on interest rate policy.

They also felt that Green span was moving too slow in the face of rising inflation. The icon of the financial market appeared to be more worried about fragile US economic recovery than the inflation rate creeping upwards. He placed much lesser faith in the wisdom of the financial markets whose " irrational exuberance" precipitated the 2001 recession.

Central bankers admit that suppressing inflation and also creating employment/growth is very difficult because of the economic principles involved and as there is not a single right answer.

More often than not the situation in any two countries, in this case America and Pakistan, tends to differ and solutions have to be country-specific. A president of a leading bank says that Green span has to be more cautious because dollar is a global currency.

In the past, the local financial markets have seen so much volatility that they need to be guided to take informed decision in the critical phase for exports in the next few months to meet WTO challenges set by the deadline of January 1, 2005, says a central banker.

The Central Bank is obligated to respond to the dynamics of interest and exchange rates to keep the exports competitive specially when related developments occur in neighbouring states offering similar products in the international market. Hence the rupee's exchange rate has been allowed to depreciate as a" measured response" to an emerging situation. Interest rates are also gradually rising.

But critics say that the market has not responded positively to the State Bank's prudent move by a section of them indulging in speculation. The market players did not demonstrate maturity.

The financial sector reforms have thrown up a powerful lobby of treasury officials in commercial banks whose business is to make profit from fluctuations in interest and exchange rates. Their influence on the markets has given rise to a view whether "too much transparency" in the Monetary Policy Statement was a wise decision.

But speculation in money markets is a global phenomenon. A key issue facing the central banks is that of exchange rate fluctuations and trade flows since early 1970s, as a result of a major shift from fixed to floating currency rates and the corresponding changes in the monetary system.

These changes have "exacerbated fluctuations in the exchange rates" and sparked off "currency crises in emerging markets", says an IMF study. And the research report notes that the issue has been of particular concern to developing states.

Although the IMF researchers conclude that the exchange rate volatility is "probably not a major policy concern", the Fund cautions that "it does not imply necessarily that the exchange rate fluctuations should be viewed with equanimity."

On measures to combat volatility, the IMF report suggests that" what is important is not that measures need to be taken to moderate currency fluctuations directly but the underlying causes of large, unpredictable and damaging movements in the exchange rates."

But, it is the responsibility of the State Bank not only to maintain price stability but also to promote growth and employment, to which it is committed. Independent economists are of the view that the financial markets must not be allowed to determine the monetary policy though their legitimate interest needs to be accommodated.

A trade-off between the risk of increase in inflation and high level of unemployment and between various interests should be reflected in the central bank's policy.

In the past decade or so, the interest of the financial markets was accorded first priority in the United States and elsewhere with serious consequences. The artificial debt-driven US economic boom of 1990s was exposed when corporate fiascoes came to light.

A massive bail-out became necessary. Trillions of dollars of tax cuts, subsidies and record low interests was lined up to help companies improve their profitability.

This turned massive US budget surplus into enormous deficit but made, at least, a fragile economic recovery possible. Europe which worries more about inflation and fiscal deficit is stuck with tardy pace of economic recovery.

Green span who kept fiscal deficit reduction as the top priority under Clinton Administration does not find five per cent budget deficit so worrisome. Former president Clinton was wise not to allow the Republicans to get a proposal to ensure a balanced budget passed by the US Congress.

In the past four years or more, economic managers in Pakistan have given too much importance, perhaps rightly so, to the financial community. Bankers now make fabulous profits.

Yet, the banks are keen that the central bank move fast in raising interests and cite year to year inflation rate. The State Bank estimates the inflation rate at 5 per cent for fiscal 2005.

It does not go by year over year(YOY) Consumer Price Index (CPI) recorded for instance for July 2004 at 9.33 per cent. The YOY inflation does not take into account the fluctuations caused in a particular month. Annual inflation smoothes out all seasonal factors and the abnormal fluctuations in a particular month.

Much of the rising inflation rate is explained by price hike in food and beverage group which the State Bank reckons can be controlled by imports. The group accounts for 40 percent wieghtage in the CPI.

Food and petroleum prices are not part of the core inflation which the central banks reckon is not the outcome of the monetary policy. The core inflation rate in June was 3.7 per cent and is estimated at just four per cent in July. Adjustments in interest/exchange rates are made on the basis of the core inflation.

Whatever the causes of volatility in exchange rates and the rising interest rates, it surely has implications for economic growth and employment. In past 2-3 years, Pakistan's monetary policy has helped kick-start the economy. The focus is now on steady acceleration in the GDP growth. The players in the financial markets are expected to help this process.