The State Bank of Pakistan has raised its benchmark policy rate by 50 basis points to 14 percent in an attempt to contain inflation, and represents a further squeezing of the economy, even though it knows only too well where the problem lies. The Banks Board of Directors, which took the decision, placed the blame squarely on excessive government borrowing. The only thing a government can do to contain inflation is curb its own spending. If, as the present government is doing, it continues spending like there is no tomorrow, while maintaining a vast army of Cabinet ministers complete with their taxpayer-paid extravagant lifestyles, even the central bank will find it impossible to ignore the disequilibrium thus introduced into the economy. The latest bimonthly review also saw a decision to strictly implement the revised limits on borrowing, even if it meant stopping payments to provincial governments. Thus, the State Bank will end up perpetuating the financial crisis by throwing the provinces into a crisis which will force them to borrow from the State Bank, and thus increase the inflationary circumstances that prevail because of the government. Meanwhile, PML(N) leader Mian Nawaz Sharif took the analysis a step further, when he told a crowd in Peshawar that corruption was at the bottom of the present inflation. Corruption means winking at all sorts of extravagances and embezzlements that a government garbed with honesty would not allow. It also means taking decisions according to the wishes of those who wish to make illegal profits. One of the most interesting aspects of the State Banks findings has been that the inflationary impact of the recent floods has not been as much as feared, because the expected supply disruption has not occurred. Which has meant that the responsibility of government for inflation is again emphasised. Not only has that inflation been persistent, but the State Bank sees it as lasting for the rest of this financial year, but persisting in the next, 2011-12, at double-digit levels, which are debilitating in the extreme. The State Bank knows that the governments policies are squeezing the private sector for credit, but by raising interest rates, it is an accomplice to the consequent strangling of the economy. Whereas the government must restrain itself, the State Bank must also work out how it will stimulate the economy while restraining inflation. The only effect of the bimonthly review system has been keeping interest rates high, and thus strangling the economy. It should keep in mind the vast number of those affected by the monsoon floods, and their need for a stimulus to the economy if they are to recover, and do what is necessary. The government must help rather than harm, or it will be rendered irrelevant, and Mian Nawazs words might prove a shadow of things to come.