While SBP addressed this overhang by raising policy discount rate from 7 to 9% in April 2005, there were renewed demand pressures as fiscal and external account deficits rose in wake of both international oil price increase as well as unforeseen spending demands triggered by the earthquake.
To offset additional demand pressures, SBP had to further raise its policy discount rate by 50bp in July 2006 along with 4.5 percentage point upward revision in reserve ratios. In line with the evidence observed for developing countries, impact of monetary tightening on curbing inflation started to be visible after 12-18 months or so.