KARACHI, Dec 2: The State Bank continued to pursue the tight monetary policy as it intervened in the money market on Friday and picked up the liquidity, raising the inter-bank money rates.

With the change of guard at the State Bank, the market was expecting some changes, especially in the monetary policy, which has been rigid for the last more than four months. The retirement of Dr Ishrat Husain as SBP governor has provided a reason for expecting flexibility in the policy.

The SBP mopped up Rs8 billion at a return of 8.3 per cent at a time when the market was watching the overnight rate coming down to 7.5 per cent in the early morning session.

The outflow immediately pushed up money rates and the overnight rate hit again 8.8-8.9 per cent, just below the discount rate at nine per cent. The SBP raised this money for six days.

Market analysts said the SBP had been highly sensitive about inflation, which was a prime concern also for the government witnessing a hike in food prices. They said the SBP wanted to maintain inflation at about eight per cent, which was also helpful in protecting the interest rate from wild fluctuations.

“Both inflation and interest rates are so important that credit offtake by the private sector was discouraged despite a fear of negative impact on the growth rate,” said Mr Aamir, an analyst at a brokerage house.

In the last four months, the credit offtake by the private sector dropped by 32 per cent. The slow growth has already started hitting the production that might end up with low growth rate by the manufacturing sector.

In a recent conference on monetary policy and exchange rate regime held by the State Bank, it was concluded that inflation targeting through the monetary policy was effective and it was suggested by several independent economists that this should continue in a situation like Pakistan.

The State Bank will review its monetary policy next month as it reviews the policy after every six months.

“I believe there would be no change in the monetary policy and credit flows in the coming six months. However, the next fiscal year may see some changes,” said Mr Aamir.

The government as well as the State Bank have already announced that inflation for the next fiscal year would be six per cent, which demands further tightening of the monetary policy — “if it does not affect the growth negatively and significantly”.

“Inflation targeting through the monetary policy may continue unless it fails to control inflation,” Mr Aamir added.

Some analysts believe that the government fears that high inflation could erode its credibility and produce instability for the government. Inflation witnessed a 100 per cent increase in 2004-05, over the preceding year.