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KARACHI: The federal government is directly injecting cost-push inflation through the petroleum levy, while the State Bank of Pakistan (SBP) has raised interest rates, increasing borrowing costs and suppressing credit growth, thereby discouraging fixed investment, said a research paper prepared by the Policy Research and Advisory Council (PRAC) and issued on Tuesday.
“The most damaging dimension of the current situation is the cross-purpose dynamic between fiscal and monetary policy,” the report said, adding that the federal government, through the petroleum levy (PL), directly injects cost-push inflation.
“The fiscal instrument creates inflation; the monetary instrument then tries to suppress it, at real economic cost to firms and households that have no control over either lever,” the paper stated.
Cost-push inflation generated through administered prices is unresponsive to higher interest rates, it said, adding that the conventional monetary transmission mechanism works by compressing aggregate demand; however, this channel is weak when inflation originates from a per-litre levy imposed on fuel prices.
