KARACHI: An overwhelming majority of analysts expect the State Bank of Pakistan to keep its key policy rate unchanged at 9.5 per cent due to inflation picking up pace again and pressure on the rupee, when it meets on Friday to unveil its monetary policy.

The central bank has already made an aggressive cut of 200 basis points to 9.5 per cent during FY13 in an attempt to spur economic growth.

Eight, of the 10, analysts polled by Dawn expect the SBP to keep the discount rate flat amid rising inflation, pressure on the local unit coupled with International Monetary Fund (IMF) repayments.

After hitting a low of 6.93 per cent year-on-year in November last year, the consumer price index (CPI) accelerated for the second consecutive month as it stood at 8.07 per cent year-on-year in January. CPI also increased 1.7 per cent over December.“It now seems the economy is on the lookout for inflation to come roaring back. If consumer prices continue unimpeded, the possibility for an interest rate reversal towards the end of the FY13 will certainly rise. We expect the central bank to go with the status quo on policy rate due to currency risk (high IMF repayments in Feb-13 onwards) and subsequent inflationary risks that may prevail amid political transition, set aside rising government inflationary borrowing,” brokerage house Arif Habib Ltd said in a note.

Inflation started accelerating for the first time in seven months in December and continued to do so in January primarily due to higher food and gas prices.

Rupee has also been touching record lows as it is trading close to Rs98 to the dollar in the interbank and approximately Rs100 in the open market.

Pakistan is also due to make a repayment to the IMF of over $500 million this month which seems to be a grave cause for concern as the country’s foreign exchange reserves are continuously depleting.

Reserves stood at $13.474 billion with the central bank’s reserves just at $8.586bn in week ended Feb 1, which puts Pakistan’s external sector in a precarious state and leaves little room for a rate cut.

Average inflation for the first seven months of 2012/13 was 8.3 per cent and is expected to be within the government's full-year target of 9.5 per cent, but it seems to be elevating and fast becoming a major concern.

“Even though 7-month FY13 CPI average at approx 8.3 per cent y-o-y, implying positive real interest rate of one per cent, we believe SBP will adopt a cautious stance in the upcoming monetary policy. In this regard, core trimmed inflation is nearly back to double digits and has averaged 9.9 per cent in 7MFY13. Considering a weak external account amidst IMF talks, any further decrease in the discount rate appears unlikely. We see increases to the discount rate later on in the year but believe the SBP may take a wait-and-see approach for now,” said Anum Dhedhi, economist at AKD Securities Ltd.

However, two analysts believe SBP may further cut its policy rate by 50 basis points to boost the economy and be able to provide the private sector with cheaper credit.

“SBP Annual Report hints at softer inflation and weaker growth outlook. This typically is a prelude to a rate cut. SBP might move for a 50bps cut given the slowdown in private credit growth. But what the IMF and other independent experts tell us is that weak forex reserve position is a serious risk to USD/PKR outlook and hence inflation. Rise in oil prices to $116 per barrel is another key risk,” said Sayem Ali, economist at Standard Chartered Bank.