It is expected by the analysts that SBP will keep discount rate unchanged at 12 percent because of a positive outlook for inflation and external account side supported by a significant decline in oil prices in the world market. "Decline in oil prices definitely will put a positive impact on Pakistan's external account, trade and inflation as government is considering an other major cut in petroleum prices during the second week of June 2012," analysts said. Oil import bill and trade deficit is also likely to come down with a decline in oil prices, they added.
However, they have major concerns on the rising government borrowing for budgetary support, as the government has borrowed over one trillion rupees during the current fiscal year so far. "It is expected that policy rate will remain unchanged mainly due to inflation numbers, as the average inflation stands at 10.97 during July-May of 2012 and full year inflation will remain below the target of 12 percent," Muzammil Aslam, an economist at JS Global, said.
He said that government had set a target of 9.5 percent inflation for the next fiscal year, "it means the policymakers are also expecting some decline in inflation in future." In addition, a depreciation in Pak rupee was already expected, he added.
Khurram Shahzad, another economist, said the SBP would raise policy rate if the government was planning to go back to the IMF, otherwise the policy rate would be stable at current level. "The CPI clocks at 10.97 percent YoY during July to May, 2012 as against 13.69 percent in the same period last year and average inflation is almost 103bps lower than the discount rate of 12 percent, therefore, we are not expecting any hike in discount rate," said Muhammad Farhan Malik an analyst at Summit capital.
As far as monthly inflation is concerned, CPI stands at 12.3 percent YoY at the end of May, 2012 as compared to 11.3 percent YoY in the previous month and 12.6 percent YoY in the same month of last year, he added. This increase in monthly CPI was mainly due to electricity, gas and fuel charges which constituted 29.41 percent of the total CPI basket, pushing the headline inflation by 73bps. Secondly, non-perishable food items which constituted the highest weight of 29.84 percent of the CPI basket, also impacted the inflation negatively by 16bps, he said.
However, according to him, the excessive government borrowing and US dollar appreciation against the Pak rupee - attributable to weak economic conditions - may further increase headline inflation. As a result of this, a hike in discount rate may be expected going forward.