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KARACHI, Feb 20: The State Bank will not go for further easing of monetary policy during this fiscal year: it may rather keep the stance of the monetary policy intact to meet the credit plan targets.
The central bank on Wednesday sent a clear signal about this policy shift by keeping the treasury bills cut-off rates unchanged and by increasing their weighted average rates by up to 74 basis points. The SBP mopped up Rs13 billion inter-bank money market against the target of Rs11 billion through sale of T-bills. The auction of T-bills had generated bids worth Rs26.32 billion but the SBP accepted only Rs13 billion bids and rejected the rest.
The SBP raised Rs10.66 billion by selling six-month T-bills and Rs2.43 billion by selling one-year bills at their last cut- offs of 6.48 per cent and 7 per cent.
While keeping the cut-offs unchanged at previous levels the SBP increased the weighted average yield by 74bps to 6.38 per cent on six-month T-bills and by 52bps to 6.90 per cent on one-year bills. What does this indicate?
“This indicates that the stance of monetary policy is going to stay as it is. No further easing is on the cards,” said a central banker who declined to be identified.
The central bank started easing its monetary policy since the start of the fiscal year 2001-02 in July to inflate the sagging economy. Between July 2001 and January 2002 the central bank cut its discount rate by 5 per cent to 9 per cent. At the same time weighted average yield on six-month and one-year T-bills fell by 6.21 and 5.17 per cent respectively.
So the monetary policy remained the subject of constant easing in the first seven months of the current fiscal year. But it did serve the purpose of boosting economy only partially. That is why the IMF has finally agreed to lower Pakistan’s GDP growth target from 4.5 per cent as envisaged in its three-year poverty reduction and growth facility to 3.3 per cent.
Senior bankers say by keeping the T-bills cut-offs unchanged and moving the weighted average yields up the SBP has signalled to banks to correct their behaviour.
“Banks had started expecting a cut in T-bills rate everytime the SBP entered in the market,” said treasurer of a large state-run bank.
This had a psychological cyclic impact on the market. “When banks start expecting a rate-cut they price their bids for T-bills accordingly leaving the SBP with no choice but to cut the rate.” Bankers say Wednesday’s action of SBP would stop banks from doing this thus enabling the SBP to keep the T-bills rates stable.
BANKS STILL NOT BEHAVING: An interesting feature of Wednesday auction of T-bills was that the central bank discarded all bids received for three-month T-bills. Bankers close to SBP said the SBP did it because a state-run bank had submitted a single bid of Rs6.6 billion for three-month bills at 5.72 per cent against the last cut-off of 5.80 per cent. “Had the central bank accepted this bid it would have to mop up much more liquidity from the market than it actually did,” explained one senior banker close to the SBP.
“That would have dried up the market frustrating all efforts of the central bank to keep it liquid.” Hence the rejection of all the bids worth Rs9.9 billion for three-month T-bills.
The bank in question had tried to corner the market also in the last auction of T-bills by submitting Rs4 billion bid for six-month bills whereas the auction target itself was Rs4 billion. At that time the SBP had thwarted the move by accepting all bids worth Rs24.7 billion instead of sticking to its pre- auction target of Rs4 billion. This had forced banks to resort to heavy discounting at 9 per cent whereas they could have got overnight funds at 2-3 per cent had they not submitted false bids.
“That was an indication that banks should not try to corner the market or to manipulate treasury bills auction. But as the Wednesday bid pattern shows some banks are still not behaving,” said a banker close to State Bank.
