An increase in the central bank's discount rate on Monday, along with earlier steps to restrict liquidity, is likely take some heat out of national economy without impacting growth too much, analysts said.
The State Bank of Pakistan (SBP) announced on Saturday its discount rate would go up to 9.5 percent from 9.0 percent from Monday.
Days earlier, it raised banks' mandatory cash reserve requirement to 7 percent from 5 percent, and their statutory liquidity requirement to 18 percent from 15 percent.
"I think the liquidity ratio rise and the hike in discount rate will significantly deflate demand in the economy," said Sakib Sherani, chief economist at ABN Amro Bank in Islamabad.
"As for inflation, food and oil are the big wild cards, but if we do not assume any worst case scenario, I think it will come around the 6.5 percent mark," said Sherani.
The government brought down average consumer price inflation to just under 8.0 percent in 2005-06, after it stood over 9.0 percent a year earlier. For 2006-07, the target is 6.5 percent.
Despite the dampening of consumption and demand, Sherani said the growth rate would lose little, as a better crop performance and capacity building in the industrial sector should keep the economy on track to meet a GDP growth target of 7.0 percent in 2006-07.
For those reasons, analysts foresaw the stock market taking the tighter monetary conditions in its stride.
"May be the stock market will fall 50-100 points around the opening, but we do not expect any major impact," said Mohammed Sohail, director of research at Jahangir Siddiqui Capital Markets.
The KSE-100 index closed at 10,353.52 on Friday, down 0.74 percent on the day, but it had risen through the week on expectations that corporate results out soon will bring good news.
"However, we do expect a 20-30 basis points increase in Treasury bill yields in the upcoming auction," Sohail said.
In the last auction on July 19, the cut-off yield for the benchmark six-month T-bill came at 8.4869 percent. The next auction is scheduled for August 2.
EXTERNAL IMBALANCES:
And while the struggle to manage inflation continues, another major concern for the central bank is a current account balance that has swung from a $1.8 billion surplus in 2003-04 to an estimated $5.7 billion deficit in 2005-06.
"The central bank can play a role in rationalising the external imbalances by curbing aggregate demand, and it is on that track now," said Asif Qureshi, head of research at brokers, Invisor Securities.
It has already taken steps to make cash cheaper for exporters, while the rate hike has made borrowing more expensive for importers and consumers of imported goods.
"They have temporarily delinked the export sector from the T-bill yields and the overall level of interest rates, which is also a move in the same direction," he said.
Earlier this month, the central bank announced a reduction of 1.5 percentage points in its export refinance rate to 7.5 percent, ending its linkage with the six-month T-bills yield.
Qureshi said this was the right time for the central bank to adopt a slightly aggressive monetary posture, as economic growth is expected to be bolstered by a strong farm sector performance.