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The articles written on this blog are based on my personal analysis. The securities target prices are for information only and is not an offer to buy or sell. The reliance on these recommendations are not guaranteed as they are based on my personal assessment as a Financial Analyst. My analysis is based on Business TV Channels, Business/ Financial websites, and from Finance books. All views that I presented are to the best of my knowledge and I invest in Stock Market with this analysis in mind. While the information contained herein is from sources believed reliable, I do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time.





Tuesday, January 18, 2011

MONETARY POLICY: NOT USEFUL BUT HARMFUL

The CPI inflation for the month of Dec 2010 is recorded as 15.46%YOY slightly decreased from 15.48%YOY recorded on November 2010. Analysts are now eying on monetary policy statement to be announced on 29 Jan, 2011. The expectations are that central bank will keep its restrictive monetary stance by increasing the discount rate by further 50bps, which means discount rate will reach 14.5%.

However, what I want to say is that in every monetary policy statement, the reason of restrictive monetary stance is mainly attributed to heavy government borrowing. However, we know very well that government has not responded at all, in fact, government borrowing has now reached PKR 459bn for this year, which is 100% higher than a previous year. The purpose for which restrictive monetary stance was adopted has not been fulfilled so why keep raising interest rates and slowing growth of “efficient private sector”? Surely, central bank needs to understand that discount rate as a tool has not been effective in curtailing government borrowing but it is certainly very effective in slowing economic growth so why keep using it and slowing our already weak economic growth. Central bank’s current stance is aggravating our economy.

In short, discount rate as a tool for curtailing government borrowing has not proved to be “useful” but it is certainly proving to be “harmful”.

There is one more way for central bank that if it really wants to make it hard for government to borrow than it should now increase the discount rate by 100-200bps. This will give a much stronger message to government. Increasing the discount rate by mere 50bps in every monetary is just not working and this is something that we all have seen, government is just not taking it seriously. So, if central bank is again thinking to increase discount rate in next monetary policy than it should increase it by 100-200 bps or either not increase it all because increase of 50bps will not serve anything as I have discussed above.

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