Monetary Policy: Great expectations and some surprises?

Pakistans economy has been described as a motorcycle economy. Pump in a couple of billion dollars and watch it go!
Perhaps the above rationale, viewed in the context of the renewed relationship between the Government of Pakistan and its super power ally, Washington; along with stable international oil prices best explains the swing in sentiments that has been witnessed domestically over the past quarter.
Back in the first week of June, BR Research conducted a survey of banks and other financial institutions to tally market expectations for the Monetary Policy Statement that was to be released on June 7, 2012. At that time, of the 27 respondents, 20 had stated that the discount rate would trend higher in coming months.
When the MPS announcement was made, the central bank held the benchmark rate unchanged at 12 percent, citing its focus on reigning in persistent inflation.
When the exercise was repeated in early August, 22 respondents from a pool of 27 expected the SBP stance to remain unchanged. However, in that month, the economic sleuths at BR Research repeated the survey a day after CPI inflation figures were released by the Federal Bureau of Statistics.
The revelation on August 12, 2012 that CPI inflation had tallied a relatively tame 9.10 percent in the preceding month swayed market sentiments greatly. From the same pool of financial institutions, 23 respondents opined in the revised survey that the discount rate would be slashed.
An overwhelming majority of these institutions had expected a rate cut of 50 bps to 100 bps. But the SBP stumped most when it announced a rate cut of 150 bps, bringing the discount rate to 10.5 percent. The central bank cited that CPI inflation had dropped to a 31 month low, sparing room for it to spur credit off-take.
This month the FBS has once again been the harbinger of good news. CPI inflation in the month of September stood at just 8.79 percent, YoY. The 35-month low inflation tally proved enough to rekindle hopes of another slash in the discount rate.
The BR Research MPS Expectations Survey, held on October 1-2, incorporated responses from 17 banks and financial institutions. This time around, all respondents opined that the discount rate will be slashed in the MPS announcement scheduled for Friday, October 5.
Of these, five institutions expect a rate of 50 bps; eight expect a rate cut between 50 and 100 bps while four respondents anticipate a rate cut of more than 100 bps.
The local bourses too, seem poised for a rate cut of 50 bps to 100 bps, according to analysts. Farhan Mahmood at Topline Securities highlighted that "banking stocks plunged by eight percent in the last two months while KSE 100 index is up 6=six percent".
Treasury bill yield on the six-month paper is down to 9.8 percent, while the 10-year PIB yield is down to 11.2 percent.
Receding inflation is definitely a major factor behind strengthened expectations of a rate cut. However it is noteworthy that NFNE inflation has remained sticky, tallying in at 10.4 percent, only marginally below the August figure of 10.8 percent, YoY.
In the last concluded Article IV Review, the IMF had already voiced that a return for Pakistan to the lenders window would require a tighter monetary stance.
Finally, the elephant in the room is government borrowing and the consequent mammoth-sized budget deficit. Considering that elections are coming up, it is much more reasonable to expect further mushrooming in the governments spending, than expecting austerity measures. Given that foresight, the central bank just may surprise for the second time in row.