KARACHI-The State Bank of Pakistan (SBP) has lowered its policy discount rate by 50 basis points to 12.5 per cent for the next two months of current financial year 2009-10. The new policy rate has been effective from today. The central bank while unveiling its November-December FY10 monetary policy statement, here on Tuesday said that it has taken this decision with a view to support the recovery of real economic activity by keeping a very close watch on developments concerning the macro-economic stability in the next two months. SBP further said the overall level of risk and uncertainty in the economy has increased considerably given the present law and order situation. 'As a consequence, the pressure on the fiscal position, especially from the financing side, has escalated and growth in the real economy is limited. Striking a balance between monetary and financial stability and real economic activity has become increasingly difficult, SBP added. According to SBP, the key macroeconomic indicators showed substantial improvements on multiple fronts during the month of October 2009. Inflation (YoY), which has fallen to 8.9 per cent in October 2009, is expected to remain in the vicinity of 11 per cent by the end of current fiscal year, it said. State Bank pointed out that the external current account improved considerably during the month under review, positively altering its projected trajectory. 'With government borrowings from the SBP remaining within the quarterly limits, the broad money (M2) has also remained contained along the projected path. State Bank also mentioned that the real sector is also showing signs of improvement as the Large Scale Manufacturing (LSM) stage a recovery after a protracted declining phase. However, a close inspection of these encouraging developments together with a pragmatic assessment of prevailing security situation in the country and fiscal uncertainties invite caution and further analysis, it added. 'Recent month-on-month inflation changes in headline and core measures continue to be volatile and on the higher side, oscillating between 0.5 and 1.7 per cent in case of the former and remaining stuck at 0.8 per cent in case of the latter. A reassuring fact is that the number of items in the CPI basket showing higher monthly increases relative to an historical benchmark has come down significantly. However, at the same time, the number of items displaying significant inflation persistence has also increased, which indicates the probable entrenchment of second round effects of inflationary process, SBP added. SBP further stated that the poor administration in the supply chain of some food items is not helpful either in positively altering inflation expectations. 'A higher than projected fiscal deficit for FY09 has also changed some underlying assumptions for inflation outlook in FY10. In addition, the full impact of electricity and gas price adjustments, a necessary part of fiscal consolidation measures, and recent resurgence of international commodity prices, on the back of early signs of global economic recovery, remains a source of uncertainty for inflation outlook. SBP stated that apart from influencing commodity prices, the recovery of global economy is expected to revive global trade and flow of liquidity across borders, which bodes well for Pakistans exports and private financial flows. 'The recent strong inflow of workers remittances and a substantially improved external current account deficit of $1.1 billion in the first four months of FY10 may allow Pakistans economy to absorb the likely swelling of import bill induced by a nascent domestic recovery and higher international oil prices, it said. The report stated that the strength and sustainability of its overall balance of payments crucially depends on resumption of foreign financial flows. Of these, portfolio inflows have picked up, direct investment has fallen, and official inflows, other than IMF, remain lower compared to projections. 'Looking forward, the magnitude and timing of expected non-IMF foreign inflows remain uncertain and could increase the challenges of SBPs liquidity management and governments budgetary financing, SBP warned. SBP stated that given the expected improvement in supply of electricity and likely increase in global demand, private sector credit may increase further. Sustained increase in the private sector credit would depend on the extent of risk averseness by banks, scale of public sectors pre-emption of limited funding sources and fresh injection of liquidity through a gradual build up in NFA of the banking system, it added. Analyzing the trend of monetary aggregates, SBP said public sectors steady borrowing requirements have the potential to raise the Net Domestic Assets (NDA) of the banking system. 'Though broadly respecting the pre-announced T-bill auction targets, Ministry of Finance (MoF) has realised Rs 91 billion for budgetary support against maturities of Rs 37 billion in the four auctions held so far in Q2-FY10. SBP further said that retirement of earlier borrowings for wheat procurement has been less than expected and to some extent neutralised by fresh borrowings for other commodities like rice, sugar, and fertilizer. 'Moreover, the credit availed by public sector enterprises continues to increase as well. Although the cumulative flow of credit to private sector during the first 19 weeks of FY10 shows retirement of Rs 3 billion, it has increased significantly in the past seven weeks (Rs 92 billion). SBP monetary policy document showed that the growth in the Large Scale Manufacturing (LSM) sector had improved in the first two months of FY10, 0.5 per cent growth compared to negative 5.7 per cent in the corresponding period of last year.