KARACHI, Oct 1: The State Bank on Wednesday signalled that the time has not come to let interest rates rise sharply though there is room for upward adjustments wherever necessary.

The central bank sent this signal to the financial markets by rejecting all the bids for one-year T-bills and by scrapping 90 per cent bids for three-month bills. Senior bankers said the SBP sold only Rs1.5 billion three-month T-bills and it did not sell one-year bills at all. The central bank had set a sale target of Rs15 billion for Wednesday auction of treasury bills and selling of only Rs1.5 billion bills means it met only 10 per cent of this target. Senior bankers said the auction had generated total bids worth Rs25.9 billion — Rs15.1 billion for three-month bills and Rs10.8 billion for one-year bills.

“Banks had come up with very expensive bids,” said a central banker when asked by Dawn why the central bank had to miss the auction target. “Had we sold more bills for three months we had to increase the weighted average yield to an undesirable level,” he explained. The central banker who declined to be named said the bids for one-year bills were so expensive that had the SBP accepted any of them it would have sent a wrong signal to banks.

Even while selling Rs1.5 billion three-month T-bills the SBP had to allow a nominal increase of nine basis points in their weighted average yield that inched up to 1.46 per cent. In the last auction held early September the SBP increased weighted average yield on three-month bills by 38 basis points to 1.37 per cent. It also allowed 53 basis points rise in weighted average yield on one-year bills that rose to 1.92 per cent. The purpose was to save banks from booking interest rate losses — and enable them to increase the rates of return on bank deposits after a lag of time.

This key signal was later on reinforced in the auction of six- month T-bills the weighted average yield of which was increased by 39 basis points to 1.60 per cent. What further strengthened the impression that the government would not allow excess liquidity take further toll on bank profits and give a floor to short term interest rates was that it announced to auction of Rs50 billion Pakistan Investment Bonds in October-December. And to make this impression look more realistic the government also cut the coupon rates on each tenure of PIBs by one percentage points. “All these moves put together led most bankers to believe that the yields on three-month and one-year bills would also rise substantially,” said treasurer of a foreign bank.

That was why in Wednesday auction some banks priced their bids for three-month bills at 2.25 per cent. Bids for one-year bills were priced between 2.26-2.75 per cent. “This bidding pattern was completely unacceptable to us,” said a central banker. In its monetary policy statement issued in July the central bank made it clear that in the given situation it would keep its monetary policy unchanged. Central bankers say the upward adjustments in T-bills rates was indicative of the SBP understanding that giving the short term rates a floor would help banks increase the rates of return on deposits. The weighted average rate of return on deposits of all banks combined fell to a humiliating low of 1.90 per cent at end of June this year against the annualized inflation rate of 3.1 per cent in July/June 2002/03.

OMO: Senior bankers said the inter-bank market was surplus by more than Rs20 billion after the SBP mopped up only Rs4.9 billion from an excessively liquid market. They said the central bank is likely to conduct an open market operation on Thursday to suck in part of this excess liquidity.