The State Bank of Pakistan (SBP), which cut policy rates by 250 basis points last year, said it would narrow the width of its interest rate corridor to 250 basis points from 300 points to minimize short-term volatility in interest rates, improve transparency and thus aid the monetary transmission mechanism.
"A rising trend in monetary aggregates is a key indicator of medium term inflationary pressures," the SBP in a statement, adding M2 growth in the 2013 financial year is expected to be close to 16 percent.
"Additionally, high growth in monetary aggregates and upward adjustments in
administered prices are the major risks to medium term inflation outlook," it added.
Due to a weakening external position and rising debt levels, the SBP said it would be challenging to anchor inflationary expectations at a low level.
Pakistan's inflation rate rose slightly to 8.07 percent in January from 7.9 percent in December, reversing a declining trend seen since June last year.
The SBP said it had anticipated the trend reversal and average inflation for the current financial year is projected at 8-9 percent, well within the bank's target of 9.5 percent for 2012/13, which ends June 30.
In the last 18 months the SBP has lowered its policy rate by 450 basis points due to a faster-than-expected decline in inflation, allowing the bank to address its concern over contracting private investment and thus the prospects of sustainable economic growth.
The International Monetary Fund forecasts 3.3 percent growth in Pakistan this year, down from a projected 3.7 percent in 2012, but up from 3.0 percent in 2011.