KARACHI - The capital market analysts and experts are of the opinion that further hike in the discount rate by the State Bank of Pakistan would badly hurt the industry and it would also give a blow to the stock market in the country. The State Bank of Pakistan is expected to announce the new monetary policy on Tuesday for the first half of the current financial year. The domestic industry and stock markets were already facing a very tough time because of the rising inflation, very high mark-up and if the central bank further resorted to increase in the discount rate, it would prove a last nail in the coffin of the manufacturing sector and the stock market, Ahmed Nabil, Chief Operating Officer, JOVC told The Nation. He said that the central bank should reduce the discount rate to provide relief to the industry and to support investment at the stock market. Financial experts are foreseeing further monetary tightening with an additional 50-100bps increase in the new statement which is to be announced today. It is important to note here that the SBP raised discount rates by 200bps to 10.5 percent during 1HFY08, and revised by150 bps to 12 percent on May 22, 2008 hence, KIBOR rose to 13 percent in the immediate aftermath of the 150bps discount rate hike. In the likely consequence of 50-100 basis points revision in discount rates in new monetary policy statement to curb inflation and reduce high budgetary government borrowing, the KIBOR would follow the increase in the policy discount rates, Currently, 1-week KIBOR is around 12.34 percent. It is worth pointing that since the interim policy chages, the current monetary policy stance and measures are not transmitting properly due to already higher lending rates that are hurting economic growth as well as fiscal deficit of the government. The head of FPCCI said, SBP should take concrete measures to reduce the differential between KIBOR and the discount rate while this decision is the domain of SBP, it is important that KIBOR which determines the lending rates of banks to industries and other business sectors is kept within reasonable limits. As it happens in the other countries, the KIBOR normally is less than the central banks discount / prime rate. "We expect a practical decision on this from the State Bank of Pakistan, he added". It may be noted that earlier, the 1 1/2 percent annualized increase in discount rate by SBP resulted in around 4 percent - 4 1/2 percent increase in KIBOR rate and about 5 percent -6 percent increase in lending rates. Therefore, SBP should take measures to narrow the increase in KIBOR rate to 1 1/2 percent - 2 percent. He also said that the Economic Managers need to take actions to ensure stable lending rates so that the expansion activity in the industrial and other business sectors does not come to a complete halt and may not aggravate the unemployment problem in the country. The country is faced with a high inflation rate due to increase in oil and food prices as a result of international factors. CPI, SPI and WPI for the year 2007-08 had increased by 12.00%, 16.81% and 16.41% respectively over the corresponding period of 2006-07. It increased by 7.77%, 10.82% and 6.94% respectively, in 2006-07 over the corresponding period of 2005-06 and in 2005-06, increased by 7.92%, 7.02% and 10.10 % respectively over the same period of 2004-05. At the same time, the business community is also expecting a positive response from SBP to spur industrial and agricultural growth. "As the interest rates are not very effective in controlling the inelastic demand of energy and food items, therefore it is important that in order to reduce demand pressures, efforts should be made to improve energy conservation and stop the hoarding and smuggling of oil and food items" the industrialists and manufacturers opined. In general, keeping in view the probable wider implications of the monetary tightening with the increase of policy discount rate would have negative implications for the all scales of the manufacturing industry, hampering industrial growth and increasing cost of doing business. State Bank should ease "industrial unfriendly", existing monetary policy rather than to make it tighter. In order to tackle the growing macroeconomic imbalances (persisting high inflation and the worsening twin deficits) and normalize economic environment of the country, the central bank should take fiscal measures that are necessary for economic remedy instead of tightening up monetary policy further.