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T-bill rate surges to record high


May 21, 2010
Commercial banks on Wednesday jacked up the rate of return on short-term financing (for three to 12 months) to the cash-strapped government by up to 100 basis points to a historic high close to 16% in anticipation of a surge in inflation reading.

Simultaneously, the Karachi Inter-bank Offered Rate (Kibor) – the rate at which banks borrow funds among themselves – spiked 35 basis points to an all-time high at 15.87%, signalling the central bank may further hike its key policy rate after six weeks.

Bank financing rates usually remain higher compared to inflation reading in the country.

Commercial banks lend money to the government through investment in sovereign debt securities including three to 12-month treasury bills (T-bills) and three to 30-year Pakistan Investment Bonds (PIBs).

On Wednesday, the government borrowed Rs506 billion through the auction of T-bills against the target of Rs500 billion.

“T-bill rates and Kibor soared to record highs after the central bank projected the full-year inflation reading on the higher side at 18-20% for the current fiscal year compared to slightly over 12% inflation recorded in the previous fiscal year,” AHL Research CEO Shahid Ali Habib said while talking to The Express Tribune.

“The high inflation reading may come down as the government is considering reducing petroleum product prices in line with the downturn in international markets.”

It was the first T-bill auction after the central bank jacked up its policy rate by 125 basis points “to a 23-year high at 15% on Thursday last week (July 7),” added the research house’s economist Sana Tawfik.

“Commercial banks have increased the cut-off yields (rate of financing to the government) on T-bills to incorporate the latest hike in the central bank’s policy rate.”

Ismail Iqbal Securities Head of Research Fahad Rauf said the commercial banks’ lending rates had gone up “on uncertainty about the central bank’s future policy rate.

He was of the view that the State Bank of Pakistan (SBP) had adopted a confusing tone in its latest monetary policy statement (MPS) issued last week. “It gave no forward guidance (outlook) on its future policy rate and said it would further see the inflation data and decide in next meetings on MPS.”

He said commercial banks had unnecessarily increased their rates on Wednesday after the central bank raised the policy rate to 15%.

“There is no shortage of liquidity in commercial banks. The central bank has injected Rs6 trillion (30% of total deposits) into banks for a period of more than two months through longer-tenure open market operations (OMOs) in previous weeks.”

The primary objective of injecting money was to bring down the commercial banks’ interest rates (both cut-off yields on T-bills and Kibor). However, “the central bank OMOs have gone into vain,” he said.

Tawfik said the inflation was likely to remain high in the range of 21-25% in July and August due to the change in base year, increase in prices of petroleum products, electricity and natural gas and the potential hike in food prices.

She called it surprising that the central bank had continued to increase the policy rate to narrow the gap with the lending rates of commercial banks. Until the recent past, the commercial banks used to adjust their rates in line with the central bank’s policy rate.

“It seems that the central bank’s policy rate has become ineffective since the cut-off yields on T-bills and Kibor are moving in their own direction.”

She, however, anticipated that the commercial banks’ rates would start coming down soon after the IMF revived its $6 billion loan programme.

The commercial banks’ rates have remained at higher levels since the government’s reliance on domestic debt increased following a sharp slowdown in the inflow of foreign financing over the past six to eight months.

Reports suggest the IMF has given the green light to publish the staff-level agreement in the coming days. This is an important document and its publication means the global lender has resumed the loan programme for Pakistan.

“Pakistan is expected to receive the next loan tranche of $1.2 billion in August. It will be followed by inflows from other multilateral and bilateral lenders as well as friendly countries.”


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