KARACHI, Oct 14: The State Bank seems set to keep the cut-off on six-month treasury bills stable and foil any bid by the banks trying to secure a substantial increase in it by making expensive bids.

Sources close to the central bank said it was in no mood to signal to the market that a tightening of monetary policy is on the cards. A low inflation and stable exchange rate recorded in the first quarter of this fiscal year also indicate that the present loose stance on monetary policy may be kept unchanged.

Year-on-year consumer inflation rose 1.78pc in July- September this year and the rupee remained almost unchanged during this period falling very slightly to 57.90 to a dollar on September 30 from 57.85 a dollar on June 30.

Senior bankers reached by Dawn said they were expecting up to 10 basis points increase in the cut-off. Last month, the SBP had increased the cut-off on six-month bills by 39 basis points to 1.65 per cent, but bankers say that primarily indicated an upward adjustment in the rates rather than a signal of tightening of monetary policy. The State Bank has set the auction target at Rs10bn against zero maturity and bankers say the market is long with Rs16-18bn surplus liquidity.

Those who say the central bank would not go for a big increase in T-bills rate are anticipating that if the banks come up with expensive bids the SBP may easily reject them and conduct an OMO afterwards to mop up surplus money. But a few bankers foresee a sharper increase in T-bills cut-off. They argue that rupee funds will come in high demand once the government starts pre-paying $1bn plus foreign debt. Finance Minister Shaukat Aziz said the other day in Islamabad that Pakistan had served notices upon the Asian Development Bank and the World Bank for pre-paying their costly debts before time.

When the government will start pre-payment of foreign debt it will need the rupee equivalent to keep in its account with the SBP.

The SBP has kept its loose stance on monetary policy unchanged since November 2002 when it had lowered its discount rate by 1.5 percentage points to 7.5pc. In its first monetary policy document released in July this year the central bank said the present stance of monetary policy will remain unchanged “unless inflationary expectations are reversed or some unanticipated shocks hit the economy.”