KARACHI: Trade and industry has attached high hopes from the much-awaited monetary policy, which will be announced on May 17, as a cut in the interest rate is expected. However, the inching up of inflation has slightly reduced the chance, said experts on Tuesday.

Fiscal disciplines strongly support the low interest rate scenario with single-digit inflation but the challenges to economy are still not over.

While keeping the interest rate unchanged in March, the State Bank justified its decision by saying that despite all positive signs including low inflation, higher large scale manufacturing growth, rupee appreciation and improved foreign exchange reserves, ‘the economy still faces many challenges’.

The State Bank on Tuesday reported on another place that the government’s borrowing from the central bank during the first 11 months of this fiscal year was minus Rs85 billion which means the government has started retiring central bank’s debt.

Another positive indicator was the monetary expansion which remained much below the last year. During the period, the monetary expansion was 6.1 per cent compared to 9.2pc during the same period of last year.

Nauman Khan of Shajar Capital said the fiscal deficit would remain within the target of 5.8pc in this fiscal FY-14 since the fiscal deficit at the end of third quarter was 3.1pc of GDP. It was 4.6pc of GDP in the same period of last year.

He further said that tax revenue increased by 16pc, non-tax revenue by 19pc and to restrict the fiscal deficit, the government has curtailed its Public Sector Development Programme’s allocations as it spent Rs196bn under the head during the nine months compared to Rs204bn of last year.

Since January this year, the State Bank has kept the policy interest rate unchanged while the trade and industry were pressuring for a rate cut that may reduce their cost of doing business.

The only hurdle for a rate cut could be inflation which rose to 9.2pc in April. Analysts believe that the State Bank is ‘allergic’ to inflation. It would be hard for SBP to cut the rate despite a number of positive economic indicators.

However, economists have been suggesting reducing the interest rate to 6pc per annum so that it may spur economic growth which has been far less than the required growth rate for the last six years.

Published in Dawn, May 14th, 2014.