KARACHI, Oct 26: A measured tightening of interest rates since the start of new fiscal year has helped in containing the growth of currency in circulation or money outside the banking system.

Data released by the State Bank show that currency in circulation or CIC expanded by 2.81 per cent between July 1 and October 2, 2004. In the comparable period of last fiscal year, CIC had grown by 4.33 per cent.

Central bankers say a measured tightening of interest rates by the State Bank has helped in containing the growth of CIC. This in turn has also kept inflation from rising too fast.

Consumer inflation rose by 9.18 per cent in July-September this year. "Had there been a higher growth in currency in circulation, inflation might have risen a bit faster," said a senior SBP official.

Rising interest rates provide incentive to those who want to keep money in the banking system. They also set in motion a cyclical flow of money from the areas of investment that are least or non-documented to the documented sectors of economy, thus curtailing growth of the currency in circulation.

SBP had started increasing interest rates way back in February this year but it stepped up this process in July after announcing its monetary policy the same month, which, said the central bank, would keep increasing interest rates if inflationary pressures persisted.

In July-September 2004, SBP raised the weighted average yields on three-month, six-month and one-year treasury bills by 125bps, 93bps and 78bps to 2.95 per cent, 3 per cent and 2.97 per cent respectively. This led banks to increase their own lending rates and that in turn created room for them to revise upwards the interest rates on fresh deposits as well.

Weighted average return on fresh deposits of all the banks combined rose to 1.51 per cent on fresh deposits generated in August from 1.20 per cent in July. The rate of return on fresh deposits mobilized in September must have been still higher, but data for that month are yet to pour in. So, rising deposit rates on the back of higher T-bills rate and banks' lending rates have apparently led to curtailment in the currency in circulation.

But whereas currency in circulation grew in July-September 2004 at a slower pace than in a year-ago period, growth in reserve money was faster. Reserve money grew by 5.42pc between July 1 and October 2, 2004. In the comparable period of last fiscal year the rate of growth in reserve money was 1.03 per cent.