KARACHI, July 25: Despite tight monetary policy the State Bank of Pakistan has to struggle with the excess liquidity in the market generating speculation about further hike in the discount rate, while bankers feel it will be counter-productive.
The central bank mopped up Rs15.15 billion from the market pushing the overnight rate up to 10.5 per cent on Friday.
Dealers said despite continued tight monetary policy, the SBP has to struggle with the market liquidity to bring it under control.
The liquidity increased on Thursday, which pulled down the overnight rate to just 7 per cent creating concern for the regulator (SBP) that excess liquidity could find ways in the market to cause inflation in the economy.
Analysts said it was not surprising that the SBP had failed to bring down the inflation through its tight monetary policy despite having strong reason to defend its position.
The record government borrowing from the SBP, higher remittances -- that are translated into local currency, unexpected high food prices and faulty distribution system that causes shortage of commodities, are some of the reasons pleaded by the SBP to defend its position against rising inflation.The SBP sold Rs15.15 billion of T-bills under 3-day repo at 9.85 per cent, said brokers adding that more OMOs (Open Market Operations) are expected in coming days to clean the market from excess liquidity.
Analysts said in the presence of excess liquidity, there was less chance for reducing the monetary growth and control the private sector credit.
Despite tight monetary policy credit to the private sector was much higher during last year and the inflation was just double than the target set for the last fiscal year.
During 2007-08, the credit to private sector grew by Rs414 billion against Rs365 billion of the preceding year.
The new elected government has already set a high target of 12 per cent inflation for 2008-09. Analysts believe that the high target was set in the wake of frequently increasing oil prices in the world market and government’s plan to inflate the economy through increasing prices of petroleum products in the domestic market.
The government acted fast to withdraw subsidy from petroleum products and the inflation gripped the entire economy.
“But still the State Bank has a key role to check the inflationary pressure by maintaining a balance between inflows and outflows of money in the banking system as well as the economy,” said a researcher.
The money market was beset with the speculation about the role of discount rate in curtailing the inflation.
“Since the State Bank would soon announce its monetary policy for next 6 months, speculation regarding the discount rate has heated up,” said a senior banker, who believes that no hike in discount rate is in the pipeline.
He said market did not need to increase the discount rate, while it would be highly negative for the capital market, which is looking for cheaper liquidity.
He said the interest rates had already gone up from 14 to 28 per cent, which is highly harmful for economic activities.
“Due to inflation the rupee faces substantial loss in its value forcing the corporate sector to borrow more money for working capital. Higher interest rate makes their borrowing costlier, which means they may reduce their activities if the interest rate goes further high,” said Abid Saleem, an analyst.
However, some analysts said the SBP might opt to increase discount rate to bring the inflationary pressure under control, which means to compromise over the economic growth. Analysts said the main inflation has already touched 21 per cent inviting SBP for corrective measures.
