KARACHI, April 10: All analysts polled expect the State Bank of Pakistan to keep its policy rate unchanged at 9.5 per cent, despite inflation clocking in at a 68 month low, due to dwindling reserves amid increasing debt repayments and pressure on the rupee.

The central bank is due to unveil its monetary policy statement on Friday for the subsequent two months.

The inflation rate eased to 6.57 per cent in March year-on-year, from 7.4 per cent in February but on a month-on-month basis, prices rose 0.41 per cent.

However though the pace of inflation has remained sluggish in the previous few months, according to Arif Habib Research “the upside risk attached to the overall inflation remains. Though some respite is coming from sustainable oil prices, however, as already identified, resurgence in the government borrowing (particularly from the central bank) and further erosion in the rupee are expected to create challenges to low inflation, going forward.”

The country’s foreign exchange reserves have depleted to $12.2 billion, with the State bank’s reserves at just $7.13 billion, barely enough to cover import payments for a little over one a half months.

“The benign CPI reading in our view has largely become irrelevant for the monetary policy considering risks to the economy remain from potential increase in government borrowing (Rs807bn FY13 to date), speculative pressures on the currency (4 per cent rupee versus US dollar depreciation FY13 to date), leading to imported inflation and weakness on external front with IMF repayments particularly if oilprices remain firm,” said Anum Dhedhi, economist at AKD Securities Ltd.

In May, Pakistan has to pay back IMF over $500 million, which seems to be a grave concern and is likely to put pressure on the rupee. With lack of external aid available, analysts expect the country to go back into an IMF loan programme even before the end of the current fiscal year.

Some analysts believe that SBP should be more proactive in defending the rupee.

“While SBP should be targeting a more active stance with regard to defence of the rupee via monetary policy, it is unlikely to change its dovish/neutral inflation data-driven stance,” said Sakib Sherani from Macro Economic Insights.

The central bank kept its key policy rate unchanged at 9.5 per cent in its last monetary policy statement in February due rising risks of macroeconomic instability and high government borrowing after lowering its policy rate by a cumulative 450 basis point over 18 months.

The analysts polled were associated with Topline Securities, Standard Chartered Bank, Arif Habab Ltd, Macroeconomic Insights, Citibank, Silk Bank, AKD Securities, Summit Capital, UBL and Ismail Iqbal Securities.