Pakistan set to stay on prolonged hold

The State Bank of Pakistan (SBP), as expected, left its policy rate unchanged at 12.50% over the weekend. We forecast that rates will stay on hold for the rest of 2010. The economic upswing should continue but the recovery will probably be weak. Meanwhile, inflation will likely stay too high and financing the fiscal deficit looks set to remain a challenge. On the markets side, the currency should continue to stabilise while we expect that government bond yields will eventually move higher.