KARACHI (Reuters) - Because the government has failed to meet its fiscal targets, when the State Bank unveils its latest monetary policy decision later this month it needs to increase its key rate to bring down inflation, economists said on Friday. The SBP is due to announce its monetary policy verdict towards the end of this month. It has kept its key policy rate unchanged at 12.5 percent since its last meeting in May. If I were to make a move, I would tighten (monetary policy), said Meekal Ahmed, a former International Monetary Fund official and an independent economist. It can be small but would be done as a 'signal to the market. If nothing else, also because of slippages on the fiscal side, monetary policy has to take up the slack. Under the IMF programme which was agreed to in November 2008 for a two-year emergency package amounting to a total of $10.66 billion, Pakistan agreed to zero net borrowing from the State Bank of Pakistan (SBP). According to SBP data released on Friday, the government overshot that target by 41.93 billion rupees ($490 million) in the 2009/10 fiscal year, a cause for concern among economists and analysts in Pakistan. Increased government borrowing from the SBP increases money supply which in turn can fuel inflation. The government and the IMF want to bring down inflation to single digits as rising inflation could threaten Pakistans macro-economic stability, choke off a wobbly economic recovery and aggravate its populace as Islamabad battles an insurgency and chronic power and water shortages. The central bank in its last monetary policy statement urged fiscal responsibility and said it was of the utmost importance that effective measures are taken to increase the tax-to-GDP ratio and reduce the current expenditures of the government. It said with inflation rising and the fiscal side not responding to the current monetary policy stance, it will look closely at the economy to ensure stable prices and economic recovery in the private sector. Average annual inflation for fiscal year 2009/10 was 11.73 percent, compared with the governments initial target of 9.0 percent. In June, inflation was 12.69 percent year-on-year. Fighting inflation has to be the top priority of the SBP and because of inaction (or only timid action) by the central bank, inflation seems to be winning the battle, said Mohsin Khan, another former IMF official who also led the negotiations with Pakistan on the emergency loan in 2008. The IMF in its country report for Pakistan released last month said it had discussions with the government which focused on the fiscal programme and also a possible tightening of the monetary policy to address the rebound in inflation.