A Reuters poll found 8 out of 13 analysts expect the central bank to increase its key policy rate by at least 50 basis points to 14 percent to combat double-digit inflation. Consumer inflation hit a 17-month high in September before easing slightly in October but devastating floods and pressure for reform from the International Monetary Fund, which bailed the country out of a financial crisis in 2008, will keep prices elevated, analysts said.
"Inflationary pressures are likely to persist for the remainder of fiscal year 2010/11 with the CPI (inflation) expected to average 17 percent for the second half of the current fiscal year," said Ayub Ansari, analyst at Invest and Finance Securities.
The central bank forecasts that inflation will average between 13.5 percent and 14.5 percent in the fiscal year 2010/11, well above a government target of 9.5 percent. The IMF has forecast average inflation of 14 percent.
A rise of 50 basis points in the key policy rate would mark the third straight increase of that magnitude after devastating floods in July and August caused $9.7 billion in damage and pushed food price higher. Tighter monetary policy would also be tied to increased to countering the inflationary threat from government spending on flood repairs. The government borrowed a provisional 178.8 billion rupees ($2.09 billion) from the central bank between July 1 to November 5.
The minority view is that the State Bank of Pakistan will leave rates unchanged and wait until January to raise them again. The current account produced a surplus in September and October, after three months of deficits, which they say will boost the rupee and so offset imported inflation. Indeed, the rupee has risen from a record low of 86.40 per dollar on October 4 to 85.62 on Friday, based on Reuters data.
FACTORS TO WATCH Pakistan increased electricity tariffs by 2 percent on November 1, under pressure from the IMF for reforms to reduce government subsidies. Sources say a further increase in tariffs could happen as soon as December 1. Reforms of a general sales tax are pending in parliament. Once passed, they would push prices higher, analysts said.