Pakistan keeps interest rate unchanged

"The State Bank is aware of the delicate balance that needs to be struck between risks to inflation and economic growth," said the State Bank governor. – File Photo KARACHI: Pakistan’s central bank on Saturday kept its benchmark interest rate unchanged at 14 percent, while asking the government to spell out a clear and coherent strategy for the economy. The governor of the State Bank also blamed government lending for adding to the country’s rising inflation, which has been exacerbated by a huge floods. "The State Bank is aware of the delicate balance that needs to be struck between risks to inflation and economic growth," Shahid H. Kardar said at a press conference while unveiling his bimonthly monitory policy. He added it was because of this reason that the bank decided to keep the policy rate unchanged. "Delays in crucial economic reforms have increased challenges for the management of the economy. Despite high interest rates, the fiscal deficit and borrowings from the banking system is continuing to stoke inflationary pressures," he said. "All this is impeding economic recovery and increasing the debt burden of the country. However, an improved external current account and stable financial markets allow for some optimism.""Under these challenging circumstances, a proactive monetary policy is necessary but not sufficient to tackle high and persistent inflation," said the governor. Kardar said inflationary pressures that were already high at the beginning of the current fiscal year that started on July 1, and remained at elevated levels until the end of 2010. In December average inflation stood at 14.6 percent, he said. "Not only did the contributing factors of inflation continue to prevail the first half of the current fiscal year, the economy also experienced an additional shock in the form of unprecedented devastating floods," he said. "To bring inflation under better control, the critical measures would be fiscal consolidation and reduction in fiscal deficit and government borrowings from the State Bank," he said. Kardar called on the government to spell out a strategy to boost the economy. "This is all the more important," he said referring to the postponement of tax reforms and reversal of the decision of increasing retail prices of petroleum products. "These actions have made it difficult to raise external resources for budget financing."The bank blamed rising inflation on relentless government borrowing and the fallout from catastrophic monsoon flooding, saying prices could continue rising by double digits into the next fiscal year. The central bank has increased interest rates 150 basis points in past five months, "to mitigate risks to macroeconomic stability". Inflation declined to just over 10 percent in late 2009 after peaking at 25 percent in November 2008. – AFP