Tight monetary policy Impact on Stock Market

Tight monetary policy Impact :


In the third week of May 2008, State Bank of Pakistan (SBP) further tightened its
monetary policy citing rising external current account deficit, growing balance of
payments, liquidity constraints in global financial markets, domestic political uncertainty,
complications on financing of external current account deficit, weakening of the rupee
against major international currencies, surging budget deficit, high growth in private
sector credit and the continued growth in headline inflation.


Accordingly, the central bank raised the policy rate by 150bps to 12.0% w.e.f. May 23,
2008 besides increasing the Cash Reserve Requirement (CRR) for all deposits up to one
year maturity by 100bps to 9.0% while keeping the CRR for deposits of over one year
maturity unchanged at zero percent. In addition, the Statutory Liquidity Requirement
(SLR) was increased by 100bps to 19% of the total time and demand liabilities. Further,
effective 1 June 2008, all banks were also required to pay a minimum profit rate of 5% on
Saving/PLS saving products.


It needs to be highlighted, however, that the success of monetary tightening measures
would depend critically on the fiscal strategy of the government. In its statements and
documents, the State Bank has all along been urging upon the government to reduce the
budget deficit to sustainable levels and finance it from sources other than the State Bank
in order to soften its inflationary impact.

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