Instead, the rate was hiked, making it likely that the State Bank was merely reacting to the global inflationary wave, and the hike was merely precautionary, to insulate the economy from the effects of global inflation. The hike was probably also meant to stop, or at least slow, the fall in the rupee, which meant that inflation was bound to go on affecting the price of imports, which include palm oil, fuel and, medicines.
It is not easy to discern what the government is trying to achieve politically, for the PDM government started off with measures to allow traders to stay out of the tax net. However, making credit tighter at the same time, does not really snake much sense. With the election year about to start, it is to be expected the government will do its fair share of.
One of the more interesting dimensions that needs exploring is how far the raising of interest rates does control inflation. The classical theory, that raising interest rates leads to lowering of inflation needs to be revisited. The assumption that Pakistan is suffering from cost-push inflation does not seem justified, as the factor of the floods does not seem to have been included in this approach. The government need to have its political goals met seem to be ignored by the current policy.
