KARACHI- The State Bank of Pakistan (SBP) is expected to reduce discount rate by another 100 basis points or 1 per cent in the upcoming monetary policy statement amid some level of contraction in macroeconomic imbalances and improvement in monetary aggregates during the previous two months of FY10, according to an analyst. After the probable downward revision by the SBP, the discount rate would decline to 11.5 per cent from the earlier level of 12.5 per cent. The SBP is set to unveil new monetary policy decision for the next two months (February-March) of current 2009-10 financial year on January 30 (Saturday). Muzzammil Aslam, research analyst at JS Research, in his report stated that the SBP would continue to pursue its soft monetary policy stance in the January policy review that was initiated in April 2009. The balance of risk between macroeconomic indicators and monetary-fiscal aggregates has been eased to some extent as inflation, real interest rate, twin deficits, government borrowing, private credit off-take and banks NPLs showed improvement in December-January FY10. T-Bill auction saw yields drop in the range of 4-16bps on January 27th, 2010 (Wednesday). This was the third consecutive auction in which yields have declined and with a cumulative decline of 30-40bps, SBP is hinting at a possible rate cut in the coming monetary policy review, he said. He projected full-year inflation to be around 10 per cent, even after the recent pass through of electricity tariff of 13 per cent. The core inflation is expected to be in single digit due to the containment of House Rent Index, he said, adding that the key risk to Pakistans inflation however, is oil prices, which seem to be stabilizing at around $75/bbl mark. Referring to real interest rate, he said the average lending rate of the economy stands at 15.0 per cent as against 10.5 per cent inflation rate thus the real interest rate for the country stands at 4.5 per cent, highest in the decade. He assumed fiscal deficit to improve in 2HFY10, on the back of the electricity subsidy pass through and improved tax receipts following the country wide crack down by the FBR. Analyst also pointed out that the current account deficit for the last six months was reported at US$1.8bn, down 78 per cent YoY. While the budget deficit has overflowed due to low tax receipts and higher expenditure incurred for the security related operation. The governments commitment to contain deficit is reflected in its recent reforms and receipts from external sources, thereby further reducing the appetite for government borrowing. Compared to first quarter, government borrowing from commercial banks in the 2nd quarter has reduced by Rs30bn. The private sector credit appetite has improved off late but is not broad based. This highlights creditors aversion for raising credit at such higher levels. Owing to suppressed demand for credit in the last couple of years, we believe the risk of NPLs is on the decline. This shows up in the falling accretion pattern in the 2nd and 3rd quarters of 2009, after peaking in the 4th quarter of 2008, he said. The analyst revealed the money supply grew by 5.39 per cent YTD, compared to the 1.21 per cent increase witnessed in the corresponding period last year. However, the liquidity crunch still persists, which is evident from the SBPs OMO profile of the last two months. Since Dec 1, 2009, SBP has injected 12 times with an average injection of Rs93.4bn compared to the 3 mop-ups averaging Rs20bn. As a result, the 6-month KIBOR yields came down from 12.83 per cent on November 30th to 12.26 per cent on January 26th. Interestingly, participation in the T-bill auctions has remained above target, depicting SBPs indirect sponsorship to fund government borrowing through scheduled banks. This way, the IMFs conditionality to not borrow directly from the Central Bank has been met. The key question now is, for how long should the Central bank continue injecting money to sponsor government funding? Our answer to this question is that either the deficit should be contained or the government should get its overdue external funding from the USA and Friends of Pakistan and PTCLs privatization receipts, the analyst said.