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- Thursday, November 24, 2011 - From Print Edition


KARACHI: Analysts at the Karachi stock market expect the State Bank of Pakistan to maintain the discount rate at 12 percent owing to the micro and macro economic threats.


The International Monetary Fund (IMF) has also suggested pursuing a cautious monetary stance, they say.


The analysts do not see the declining inflation trend to be maintained unless the government seeks to contain its fiscal deficit. Moreover, current account balance after a brief spell of surplus has already returned to deficit led by downturn in exports.


The central bank is due to announce the monetary policy for the next two months on November 30. It cut the key policy rate by 150 basis points to 12 percent on October 8. “Since Pakistan has decided not to opt for a new IMF programme, we agree with the IMF on cautious monetary stance,” said Muzzammil Aslam, Head of Research at JS Global. “We believe there is a room for further policy easing if inflation stats are seen in isolation.”


If Pakistan manages to tackle the issues of declining exports and IMF re-payments in the next few months, the SBP will have a choice to revisit its policy somewhere in the last quarter of the current fiscal year, he said.


Experts say that declining exports, mainly of textile goods, massive currency adjustments around the globe and lack of inflows under Kerry-Lugar bill and Coalition Support Fund do not leave space for further monetary easing.


Farhan Bashir, an analyst at InvestCap, said that the primary focus of SBP has been on stabilising the inflation, which is descending, but mainly due to the base effect. “By the end of this calendar year, inflation will start going up and is likely to reach 12 percent in the second half of the fiscal year. Therefore, monetary easing would put the real rates into negative.”


Bashir said that the external account is already under pressure, which suggests the policy rate would be kept stable.


The 150 basis points cut in the policy rate two months ago has not brought any visible changes in investment and private sector credit off-take.


Nauman Khan, an analyst at Topline Securities, said the upcoming monetary policy stands at a crossroads of either to protect the feeble economic recovery or to curb the looming inflationary pressure beyond January 2012 as the base effect fades away.


“With real interest rate expected to remain in the positive territory, we anticipate the central bank would follow the regional trend of providing impetus to the economic growth. Therefore, we expect another round of 50bps cut in the upcoming policy.”


However, Khan also highlights risks to this assessment coming from fragility of external account and escalating fiscal deficit.