KARACHI - State Bank of Pakistan (SBP) is expected to reduce the discount rate by 2 per cent from July this year. The IMF programme's target of reducing inflation to 20pc by June 2009 will be comfortably met. It is expected that the monetary policy focus to shift towards growth in H2-2009. "We anticipate rate cuts of 200bps in July 2009, following the second IMF staff assessment and as new power projects come online, removing key supply side constraints. These upcoming economic developments had been pointed out in a research report titled "Pakistan: Greater Stability", prepared by the Standard Chartered Bank of Pakistan. Report said the size of the fiscal deficit narrowed to some extent during H1-FY09 which showed that the government is on track to meet its full-year deficit target of 4.2pc of GDP, as agreed under the IMF Programme. Report has also predicted the trade deficit to narrow to 14 billion dollars in the current fiscal year, 9 per cent smaller than the 15.3billion dollar deficit of FY08. The narrowing trade deficit and the build-up of FX reserves have strengthened the Pak rupee, which traded at 78.2 on 14 January, an appreciation of 5.4 per cent from November 2008. While the exchange rate against the value of US and other major currencies is projected to fall further to 82 by year-end. Report highlighted that headline inflation in December 2008 reached 23.3 per cent on year-on-year basis as compared to 24.6 per cent in November and 25 per cent in the month of October FY09. Inflation has started to decline since Q2-FY09 on account of slowdown in international commodity prices hence inflation is expected to reach single digit by the end of 2009. "A stable value of Pak rupee has helped to transfer falling international commodity prices to domestic consumers. Zero net fiscal deficit financing from the central bank during Q2-FY09 (October-December 2008) arrested money supply growth and will likely reduce demand-side inflationary pressures going forward", report disclosed. On account of improving macroeconomic indicators it is expected that policy makers would shift their focus towards growth in the second half of the year, Report said, Report mentioned that the narrowing trade deficit was the result of a lower import bill caused by sharply falling international commodity prices, was also reducing pressure on FX reserves. The import bill in FY08 (July 2007 to June 2008) jumped 31 per cent y-o-y to USD 35bn, primarily on account of a 43 per cent y-o-y increase in the oil import bill, as nearly 80 per cent of domestic energy demand was met through oil imports. The decline in international commodity prices had started to show up in the import bill, which declined 22 per cent m-o-m in December 2008. Report also said medium-term risks to macroeconomic stability would remain so due to the global recession, internal security challenges, and escalating tensions with India. "The global economy is slowing as a result of the credit crisis which has kept markets very volatile. The negative fallout is showing up in Pakistan's slowing export growth and declining foreign investment inflows. On the domestic front, the security environment is worsening, and military operations in the tribal belt bordering Afghanistan have had little traction", report pointed out.