ISLAMABAD - Rising interest rate would have a little impact on dampening the inflation, but it would increase the interest payments on government debt, which will cause an even higher fiscal deficit. The State Bank of Pakistan (SBP) had raised the interest rate by 50 basis points to 13.5 percent in September, however, this will increase interest payments on government debt which will cause higher fiscal deficit even if we take into account higher profits of the State Bank. Pakistan Institute of Development Economics (PIDE) said this in its viewpoint on the recent monetary policy. According to the PIDE, the government is borrowing beyond the agreed level from the SBP, and the central bank is not able to restrain this level of borrowing. Borrowing from the SBP injects liquidity in the system through increased currency in circulation. The report stated that there are clear signs that at least in the foreseeable future the economy will witness low economic growth and high double-digit inflation - the classical characteristics of an economy in stagflation and the real challenge, therefore, is to draw up a coordinated strategic response to break out of stagflation by rekindling growth and checking inflation. The real hit of high interest rate, according to PIDE, is being taken by the private sector. Higher interest rate increases the cost of borrowing of the private sector, which discourages the demand for private sector credit. When the demand for private sector credit decreases, the level of private investment falls that adversely affects prospects of economic growth. The PIDEs report is fully supportive of the SBPs emphasis on government putting its fiscal house in order. However, what is equally clear according to PIDE is that a tight monetary policy stance through increase in the discount rate serves little purpose in the current conditions. What is needed is an integrated fiscal cum monetary response, which brings about macroeconomic stability and helps spur much needed economic growth. Also fiscal reforms are easier to undertake and yield desired results in a growth promoting rather than a depressed economic environment.