December 25, 2003	Thursday	Ziqa’ad 1, 1424

KARACHI, Dec 24: The State Bank on Wednesday succeeded again in keeping treasury bills rate unchanged. But it earned this victory by scrapping 96 per cent of the bids — thus annoying several banks.

The central bank sold Rs200 million one-year TBs against total bids of Rs4.9 billion received for one-year and three-month T- bills combined. It had earlier set the sale target at Rs15 billion. Senior bankers say the SBP may call an open market operation later this week to make up for the shortcoming in TBs sale on Wednesday.

The SBP sold Rs200 million one-year TBs at a weighted average of 1.99 per cent—almost unchanged at the previous level of 1.98 per cent.

Sources in SBP told Dawn that it sold only Rs200 million one- year TBs or just four per cent of the total bids received in Wednesday auction to keep their yields from rising. “Because banks could have misread that as a signal for change in monetary policy stance,” one of them said. The SBP will issue next month its monetary policy statement for January-June 2004.

In July it issued a policy statement for July-December 2003. In that statement the SBP said that the monetary policy stance would remain unchanged “unless the inflationary expectations” dismissing an upward pressure “are reversed or some unanticipated exogenous shocks hit the economy.”

For the State Bank inflation is yet to show an upward pressure —and obviously no exogenous shock has hit the economy. Hence its moves to keep TBs yield from rising so that the financial market does not go berserk in anticipation of tightening of the monetary policy. “That is what it is,” sums up a senior central banker.

BANKERS’ VIEW: But bankers say that by keeping T-bills yields unchanged the SBP is trying to delay—”only the inevitable.” They say that annualised consumer inflation of 2.62 per cent in July- November 2003 shows that it may shoot up past the four per cent target set for July/June 2003/04. Hence the need to tighten the monetary policy.

Bankers say that a huge increase in money supply as well as in cash holding also point to the fact that the time has come to let the interest rate rise. “Otherwise there will be no incentive left for the public to put money in banks except for security,” says treasurer of a local bank.

On an average, banks are currently paying a quarter per cent to one per cent return on saving deposits and 1-3 per cent return on one-year term deposits. Bankers say they cannot improve these rates of return unless they get higher return on treasury bills.

But central bankers say banks should create room for raising returns on deposits by reducing their cost of operations instead of relying only on TBs yields.

MARKET SENTIMENT: SBP policy of scrapping T-bills bids to keep their yields unchanged is inviting growing criticism from banks.

“It is a cruel joke,” said treasurer of a local bank referring to scrapping of 96 per cent of the bids received for T-bills on Wednesday. The SBP has done this several times in the recent past “primarily to quell banks’ self-fulfilling prophecies of interest rate rise,” according to a senior central banker.