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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Weekend Edition Singapore Asia Pacific World Q+A-Pakistan's central bank grapples with inflation, low growth Reuters - Saturday, November 27 Send IM Story Print Nov 26 - By Sahar Ahmed KARACHI, Nov 26 - Pakistan's central bank is expected by most analysts to raise its policy rate by 50 basis points to 14 percent on Monday, which would be its third such increase since devastating floods in July and August. Here are some questions and answers about the country's inflation and policy responses: WHAT ARE MARKET EXPECTATIONS? A Reuters poll found 8 out of 13 analysts expect the central bank to increase its key policy rate by at least 50 basis points to 14 percent because of continued high government borrowing and persistent inflation. HOW SERIOUS IS THE INFLATIONARY THREAT? Very. The government had set a target of 9.5 percent for average inflation in 2010/11. But in September it reached a 17-month high of 15.7 percent and the central bank has said inflation is likely to average between 13.5 percent and 14.5 percent this year. The floods destroyed crops and roads, forcing food prices higher. The rupee has fallen sharply in recent years and hit a record low in October, exacerbating the inflationary pressure on the economy from the rising price of world commodities. On top of that, reforms demanded by the IMF following its financial bailout of the country in 2008, are forcing other prices up. The government raised electricity tariffs on Nov 1 and sources said further increases could happen as soon as Dec 1, Reforms to a general sales tax, which is pending in parliament, would raise prices. While the reform could cause a temporary rise in inflation, the central bank is worried that they could fuel an increase in inflation expectations, such as through wage demands. The central bank is also worried that government borrowing for flood repairs may prove inflationary as the cash is distributed through the economy. The government borrowed a provisional 178.8 billion rupees from the central bank between July 1 and Nov. 5. CAN THE CENTRAL BANK GIVE PRIORITY TO ECONOMIC GROWTH? It will be difficult given inflationary pressures and demands from the IMF in exchange for its loans. But growth is weak. Following the floods, the government cut its economic growth forecast to 2.5 percent for fiscal year 2010/11, almost half the original target of 4.5 percent. However, the current account has swung to a surplus in September and October, which could support the currency. A sustained pick up in the currency could persuade the central bank that it can ease up on the pace of rate rises. Reconstruction can spur growth and commodity prices have doubled, pushing up the incomes of those working in agriculture, which is about 40 percent of the population. WHAT'S THE RUPEE'S PERFORMANCE? Since hitting a record low of 86.40 per dollar in early October, the rupee has risen close to 1 percent, helping offset import price rises and so providing some relief to inflationary pressures. However, the currency is still down 1.5 percent since the end of 2010. (For more Reuters coverage of Pakistan, see: http://www.reuters.com/places/pakistan) (If you have a query or comment about this story, send an e-mail to news.feedback.asia@thomsonreuters.com) Recommend Send IM Story Print Related Articles FOREX-Dollar rallies as widening debt fears weigh on euro Reuters - 36 minutes ago X5 ups rollout plan, eyes 2011 step-up Reuters - 48 minutes ago India's Shipping Corp share sale to raise up to $259mln Reuters - 53 minutes ago Dollar extends gains to trade above 84 yen Reuters - 54 minutes ago Former Liffe director working with Chi-X Europe Reuters - 59 minutes ago News Search Top Stories Portugal fights eurozone contagion, adopts budget EU says not pressing Portugal to take bail out Spain, Portugal fight fear of Irish contagion Spain's Zapatero 'absolutely' rules out bailout Portugal: under no eurozone pressure for financial aid More Top Stories » ADVERTISEMENT Most Popular Most Viewed Most Recommended Wealthy Americans say: 'Tax us' to ease deficit' 600,000 die each year from passive smoking: study US, S.Korea plan war games after N.Korean attack Europe bans baby bottles with Bisphenol-A New AIDS cases fall by one fifth in a decade: UN More Most Viewed » 'Naked' airport scanners may be 'dangerous' EU fines 11 airlines 800 million euros for air cargo cartel Pilgrims stone 'devil' as Muslims celebrate Eid World leaders scramble for funds to save the tiger US, S.Korea plan war games after N.Korean attack More Most Recommended » Elsewhere on Yahoo! 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