NRB to stem price rise with new monetary tools

Bank rates increased to 6.25 per cent

Kathmandu, February 22:

Being harried by the rising inflationary pressure and a prise rise in petroleum products, Nepal Rastra Bank (NRB) has introduced new ‘monetary instruments’ to control inflation and bring about price stability.

Bijay Nath Bhattarai, governor of NRB, while releasing a mid-term review of monetary policy has said that the central bank, as a policy response to the risk of inflation, has revised bank rates by 25 basis points to 6.25 per cent from an earlier level of six per cent which is expected to bring about stability in the money market and prices.

Bhattarai said that the supply shock, especially of oil prices, has generated pressure on the overall price level. Despite the aggregate demand, monetary factors have little role in it. However, the supply-induced spurt in prices, has generated inflationary expectations, the governor said. Therefore, a hike in the bank rate is indented to anchor inflationary expectations. The governor said that there is a possibility of drop in the agriculture sector’s and industrial sector’s performance.

Bhattarai observed that there would be a low GDP growth rate in coming days due to low performance by major economic sectors. Due to intensifying row between the National Planning Commission (NPC) and the ministry of finance, the NRB governor did not disclose the GDP growth figures, although it was in practice in earlier times. But he claimed that GDP would go down during the current fiscal.

Krishna Bahadur Manandhar, deputy governor of NRB, said that the bank rate is an indication for the banking sector which guides ‘interest rates’ of banks. NRB already has over Rs 12 billion in treasury bills which is enough to maintain market stability, informed Manandhar.

Bhattarai said that the central bank would never lag behind in taking actions against wilful defaulters, specially the large ones.

He said that foodgrain production is likely to decline marginally in 2005-06 owing to unsatisfactory weather conditions both during summer and winter seasons. He said that manufacturing production grew at a low rate of 2.4 per cent in the first quarter of 2005-06 compared to a growth of four per cent in 2004-05.

Keshav Acharya, chief of research department at the NRB, said that a hike in petroleum prices has increased inflationary pressures. He also said that due to internal conflict, there is a greater government expense and a larger budget deficit.

Similarly, the central bank, in order to control inflation, will mop up liquidity from the market through the issuance of treasury bills, said Acharya.

According to central bank officials, NRB with today’s announcement, can intervene anytime in the money market through open market operations to ensure the financial sector’s stability.