KARACHI - The benchmark 6-month Karachi Interbank Offer Rate (KIBOR) is projected to drop by 138 basis points to 11 per cent while the interest rate by 150bps to below 11 per cent in the last quarter (October-December) of the current calendar year. Currently, the KIBOR for the six months tenure is hovering at 12.38 per cent and the discount rate is at the level of 12.5 per cent. The deceleration in the KIBOR and other market related interest rates along with declining inflation, would pave the way for further reduction in discount rate and to improve the credit off-take growth of the commercial banks to the public and the private corporate sectors in the time to come. It may be mentioned that market interest rates have inched towards the higher end of the interest rate corridor, with the benchmark 6-month KIBOR, which as on March 27, 2010, reached 12.44 per cent a versus 12.25 per cent at the end of January 2010. Similarly, the benchmark 6-month T-bills rate had already moved up by 50bps since the last monetary policy meeting in January 2010. The shift in the yield curve and higher demand for shorter-maturity paper indicates that market uncertainty remains over whether or not current govt policies will bring down inflation. Standard Chartered Bank Chief Economist Sayem Ali in his report stated, While the 2010 outlook is clouded by uncertainty, the right policy measures could support growth momentum and lead to a sustainable decline in inflation. But this will take some time. According to CE SCB, the central bank will not change rates before a clearer picture on the tax measures and pledged FX aid emerges. Therefore, we expect the policy rate to remain on hold at 12.5 per cent in Q2-2010, but the burden of government deficit financing should move market rates higher. In H2-2010, we believe the critical factors that will determine the monetary policy stance will be the governments ability to successfully implement VAT and remove the circular debt. Implementation of VAT is the cornerstone of the stabilisation plan and would have a strong deflationary impact by containing the large fiscal deficit and hence reducing the need to print money for deficit financing, Ali said and added declines in reserve money would more than offset the inflationary impact of imposing VAT on products and services currently exempted by the GST regime. Similarly, the removal of circular debt would bring additional power supply on line, removing the main contributory factor to supply-side inflationary pressure. He further said any downward adjustment to the wheat support price would also have a significant impact on inflation, as wheat prices alone contribute 5.6 per cent of the CPI basket weighting. Any progress on the above-mentioned factors would help ease headline inflation in H2-2010 to 11 per cent, from average projected CPI inflation of 13 per cent in H1-2010. In our view, this would give the SBP the space to ease the policy rate to 11.5 per cent by end-2010, said Sayem Ali.