June 26, 2003	Thursday	Rabi-us-Sani 25,1424

KARACHI, June 25: The SBP did not allow banks on Wednesday to invest large amounts of surplus liquidity in treasury bills, thus preparing the market to participate aggressively in the upcoming auction of long-term bonds.

The central bank rejected 92 per cent of total bids received for six-month bills: it accepted only Rs1.5 billion bids out of total Rs19.375 billion. The result was that the central bank managed to bring back the cut-off yield on the six-month paper to pre-May 28 level. On May 28, the cut-off had risen to 1.84 per cent from 1.68 per cent; on Wednesday it fell back to 1.67 per cent.

“The message is clear,” said treasurer of a large local bank. “The SBP has left enough liquidity in the market to enable it to participate aggressively in the bonds auction — and it has also signalled that the yield on T-bills are going to remain low.”

The cut-off had to be raised by 16 basis points on May 28 not because the SBP wanted to signal any reversal in its loose monetary policy stance — but because it had to honour the sale target of the treasury bills.

“By bringing back the cut-off to the level where it was before May 28, the central bank has clearly signalled that the low rate environment will continue,” said treasurer of a foreign bank.

Finance Minister Shaukat Aziz has also said publicly that the government would let the low interest rates environment continue.

DISCOUNT RATE: Senior bankers say the State Bank may even consider lowering of its discount rate, which is supposed to be the anchor of its monetary policy but has merely become a penal rate. “Prospects (of discount rate cut) may brighten if the Fed makes a cut in its discount rate today,” said a senior foreign banker. The US Federal Reserves popularly known as Fed was all set to cut it discount rate on Wednesday. Majority of the Wall Street analysts were expecting a 25-50 basis points cut in the Fed rate.

Pakistan’s discount rate has remained pegged at 7.5 per cent after the SBP had last lowered it by 150 basis points in November 2002. But during this the weighted average yield on six-month treasury bills has recorded a big fall of more than four per cent. That has widened the gap between the two rates from 2.7 per cent to 5.9 per cent.

Senior bankers say this extensive gap has brought in question the reliability of discount rate as the anchor of the monetary policy and have been eagerly waiting for a cut in it to get a clearer signal on future direction of interest rates.

PIB AUCTION: Bankers say the T-bills auction on Wednesday got a lukewarm response from the banks despite the fact that the bids totalled Rs19.375 billion against the sale target of Rs2 billion.

“The market is long by about Rs40 billion. So participation of banks with Rs19 billion bids cannot be termed as a big response to T-bills auction,” explained treasurer of a local private bank.

“Banks know the government wants them to participate in a big way in the PIBs auction on June 28 and improve their yield. So all eyes are set on that.”

The government wants to improve the yield on PIBs to avoid lowering the rates of return on national saving schemes by a big margin because it can generate political heat. The rates of return on NSS were linked with the yield on PIBs to make them market-driven on the insistence of the IMF.