KARACHI, Oct 24: The State Bank would cut the coupon rates of long term Pakistan Investment Bonds in November when three-year and five-year bonds would be up for sale.

Economic Adviser of the State Bank Dr Mushtaq A Khan told a meeting of primary dealers that the coupon rate would remain intact at 13 per cent for 10-year bonds that would be auctioned on Monday. Primary dealers are the banks selected by the central bank to sell PIBs in the secondary market.

Sources close to the meeting said primary dealers had met Dr Mushtaq and other senior SBP officials on Wednesday to know if SBP would change the coupon rate on 10-year bonds after a 2 per cent cut in its discount rate. Last week SBP had lowered its discount rate from 12 to 10 per cent to pull the economy out of a slump. Dr Khan explained to them that since the schedule of the auction was announced before the cut in discount rate there would be no change in the coupon rate this time.

But he assured them that when the SBP would hold next auctions of the long-term bonds their coupon rates would be revised. He said that the coupon rates would be changed keeping in view the cut in the discount rate and the bidding pattern for the bonds.

In August when the State Bank had slashed its discount rate from 13 to 12 per cent it had also cut the coupon rate from 12.5 to 11.80 per cent on three-year bonds; from 13 to 12.20 per cent on five-year bonds and from 14 to 13 per cent on ten-year bonds.

The sources said Dr Khan also made it clear that the sale target of Rs12 billion would also remain unchanged for the auction of 10-year bonds on Monday.

They said the SBP officials promised to bail out two primary dealers that had sold around Rs450 million worth of 10-year bonds after the announcement of the auction schedule on October 8.

These banks had sold the bonds in advance as they had no knowledge of a possible cut in SBP discount rate within days after the announcement of the auction schedule. The discount rate or the rate at which SBP lends money to the banks for up to three days against approved securities naturally has an impact on the pricing of the bonds.

The banks say the State Bank should have cut the discount rate before announcing the schedule for the auction of the bonds. The SBP cut its discount rate on October 20.