KARACHI, Oct 4: A majority of analysts expect the State Bank of Pakistan to cut interest rates by 100 basis points to 9.5 per cent, the second cut in 2012-13 fiscal year, when it meets on Friday to unveil its monetary policy.

The central bank made an aggressive cut of 150 basis points to 10.5 per cent in the first monetary policy for FY13 in August.

Eight, of the 14, analysts polled by Dawn expect SBP to trim the discount rate by 100 basis points amid easing inflation and to encourage economic growth.

Two of the analysts even expect SBP to slash it by as much as 150 basis points.

CPI inflation decelerated to a 33-month low in September to 8.79 per cent year-on-year, lower than the average market expectation of 9 per cent which analysts believe gives SBP enough room to continue with the monetary easing.

“Considering the SBP appears to have been targeting CPI, positive interest rates of approximately 1.5 per cent suggest the central bank has ample space to cut the discount rate swiftly where we eye a rate cut of at least 100 basis points,” said Anum Dhedhi, economist at AKD Securities Ltd.

Inflation has been in single digits for the first quarter of 2012-13 fiscal year as it has averaged at 9.15 per cent.

However, SBP stated clearly in its last monetary policy statement that its priority is to promote economic growth and investment, especially for the private sector, even if it means that full year inflation target may be missed, which according to some analysts raises serious concerns.

“In taking the monetary policy decision, the Central Board of Directors of SBP have decided to give a relatively higher weight to the state of private sector credit and investment in the economy, knowing that the projected inflation for FY13 could remain slightly higher than the target,” SBP said in its last monetary policy statement.

Some analysts believe the SBP’s expected cut could be a political move as recent cuts have not translated into improvement in investment or economic growth.

“On the other hand, one more reason that cut is being expected is to be a political decision. Since elections are around the corner, here lies an opportunity for the government to intervene to gain the support of business and investor community,” Arif Habib Ltd said in a note.

Also a cut in the interest rates would mean that the government’s debt servicing costs would decrease, as it is the biggest borrower. For example, the slash in discount rate of August trimmed debt servicing cost by almost Rs45 billion. And if it remains the banks biggest borrower, banks would not lend to the private sector.

There are also structural issues, such as energy shortages and fiscal imbalances mainly due to government’s huge borrowings from the banking sector and analysts said that without fixing them first, investment and economic growth won’t pick up.

“Further cut will have little bearing on economic growth. Unless power load-shedding issue is resolved, the monetary stimulus would be ineffective,” said Muzzamil Aslam, Managing Director, Emerging Economics Research, the only analyst expecting the SBP to keep its policy rate unchanged at 10.5 per cent.

There are several risks to a rate cut, such as further depreciation of rupee on higher lending and money supply which hit a record low of 95.16 this week, balance of payments could come under pressure amid lack of external assistance, rising oil prices and repayments to the IMF.

But most analysts agree on one thing: This may be the last of monetary easing by the SBP for the remainder of the current fiscal year.

“We opine that the upcoming policy would conclude the monetary easing phase by the central bank and the trend will reverse in the second half of FY13,” said Furqan Punjani, an analyst at BMA Capital Management.