State Bank raises policy rate to 13.5 pct

KARACHI: State Bank of Pakistan Wednesday announced an increase in its key policy rate to 13.5 percent from 13 percent in a bid to contain the fiscal deficit and combat rising inflation. "A tightening of the stance is thus called for in full recognition that the difficulty to contain the fiscal deficit has resulted in the private sector bearing the full brunt," the SBP said in a statement. Pakistan's economy was fragile even before devastation floods ripped through the country in August. The State Bank of Pakistan raised the rate by 50 basis points to 13 percent on July 30, also to control inflation and the fiscal deficit. "Post-flood projections raise legitimate concerns about the worsening of the macroeconomic balances," the central bank said, adding that the government was not doing enough to reduce the deficit. A widening fiscal deficit increases aggregate demand and fuels inflation. The government has borrowed 220 billion Pakistani rupees ($2.55 billion) from the central bank from July 1 to Sept. 24, missing the target of zero net borrowing from the State Bank of Pakistan. The central bank said GDP growth could fall to 2.5 percent in fiscal year 2010/11, compared with the original target of 4.5 percent. Inflation for the fiscal year ending June 30 could be between 13.5 percent and 14.5 percent, compared with the original target of 9.5 percent.