The State Bank of Pakistan has left its overnight lending rate for banks flat at 9.5 per cent. But it has increased by half a percentage point to seven per cent or the rate at which banks can park surplus overnight funds at the central bank.

Thus the gap between the two rates has fallen from 300 basis points to 250 basis points. This new rate structure unveiled on February 8 by Central Bank Governor Yaseen Anwar is the core of the new monetary policy effective from February 11 for the next two months.

The tone of the monetary policy statement and the facts furnished to justify the SBP decision suggest that SBP has taken a pause in its more than a year-long monetary easing and is, in no way, bent upon reversing the lax monetary policy stance.

The decision to leave the SBP key policy rate unchanged after a cumulative cut of 400bps since August 2011 at a time when inflation has started inching up after witnessing substantial decline and growing fiscal constraints show little room for the government to abate its inflationary borrowings from the central bank makes sense for bankers.

But, as Mr. Yaseen Anwar pointed out, inflation has restarted rising primarily due to higher food prices and as there is a possibility that higher than expected non-tax revenue and huge non-bank borrowing of the government through National Saving Schemes may finally provide some fiscal breather to the government, it won’t be surprising if the central bank opts for chopping interest rates again after some time.

Bankers say the narrowing down of the width of the interest rate corridor, or the difference between the rate at which SBP makes overnight lending to banks and the rate at which banks makes similar lending to SBP, is a wise move.

“The reason is that by applying brakes to monetary easing after giving it a go for quite some time, the central bank has made it slightly difficult for the government to continue to borrow from banks at continually falling rates. And by increasing the rate at which banks can park overnight surplus funds at its discount window, the SBP has made the day- to -day liquidity management easier for banks,” explained treasurer of a large local bank.

“This liquidity management cushion would also