Market, not IMF, dictated SBPs MPS?

Its interesting to see the State Bank reacting to market expectation in the last eighteen months or so. And not surprisingly, it has nodded to market expectation yet again, as the money market yields in the last auction signaled a cut of 50 basis points with the market widely expecting the base rate to come down to 12.5 percent.
At one end the central bank expressed satisfaction on relatively lower inflation, improvement in external balances and slight expansion in LSM amid fresh increase in private sector credit off-take that rose by Rs92 billion in the past seven weeks after showing dismal performance since the start of this year. But at the other it laid the onus of delicate balance on fiscal financing from domestic sources.
"The magnitude and timings of expected non-IMF foreign inflows remain uncertain and could increase the challenges of SBPs liquidity management and government budgetary financing" said SBP statement, noting that a higher than projected fiscal deficit for FY09 has also changed some underlying assumptions for inflation outlook in FY10. It also cautioned that recent rebound in international commodity prices, on the back of early signs of global economic recovery, remains a source of uncertainty for inflation outlook.
These statements point to the implicit low room available to money managers to part from fiscal counterparts. It also highlights the fragility of economic recovery exposed by slight increases in global commodity prices, especially crude oil. Thus, there is not going to be any mercy to private borrowers amid bleak law and order situation.
The war against terror has not only increased fiscal spending but it has also arrested foreign direct investment and while doubts on FoDP commitments further pressurize the fiscal balance. So considering the IMF conditionalities of tight monetary and fiscal management amid firm global crude oil prices and the absence foreign aids and soft loans for fiscal support, cutting rates further in upcoming reviews will be a mounting task of MPS committee.
Although, the SBP expects the inflation to remain in the vicinity of 11 percent by the end of this fiscal year, it might touch 13 percent by the end of third quarter, as the increase in power and gas tariffs will add woes to price stability measures amid rising crude oil.
Quite naturally, the underlying tone of policy statement at the time of declining trend in interest rates during the last nine months depicts a more cautious approach by the central bank going forward. The SBP said that higher month-on-month inflation in the last couple of months enhances the probability to keep the second round of inflation at bay.
How will the markets take this? Well, they will react not on the rate cut as much was priced-in but on how the central views the situation, which means that bond market yields might marginally increase while the stocks might falter.