KARACHI, Aug 18: The State Bank on Wednesday raised weighted average yield on six-month treasury bills by 10 basis points to around 2.62 per cent.

This sends a strong signal to the market that the central bank would continue raising interest rates to curb inflation but would not let them rise too fast.

Senior bankers said they were anticipating a modest increase in T-bills yield but a just 10 bps rise was lower than their anticipation. "This increase is a bit lower than what the market was expecting," said treasurer of a large local bank.

The SBP sold Rs47.4 billion TBs - higher than the pre-auction target of Rs35 billion but much below the market demand of Rs81 billion. With the weighted average yield on six-month bills at 2.62 per cent now the export refinance rate of 2.5 per cent in August is likely to remain unchanged next month.

This means that eligible exporters may continue to get export financing from banks at a maximum markup of 4 per cent in September. A 45bps increase in the average yield on six-month bills in July had pushed up export refinancing rate to 2.5 per cent in August. As a result exporters are paying up to 3.5 per cent on export loans during this month.

Pakistan has set $13.7 billion export target for this fiscal year up from the actual exports of $12.3 billion in last year. The central bank in close collaboration with the government is trying to keep the cost of export financing at a low level to help exporters meet this target.

A substantial increase in the financial cost of production of exportable goods is bound to hit exporters whose competitiveness is already at stake because of soaring inflation at home that has made their products costlier.

Inflation measured by Wholesale Price Index or WPI went up by 10.19 per cent in July 2004 over July 2003. Loosely interpreted it means that inflation for the businessman was at 10.19 per cent in July.

This high inflation for the trade and industry will show up in consumer inflation in the months to come. Consumer inflation or inflation measured by Consumer Price Index or CPI also moved up by 9.33 per cent in July this year - at its highest pace in seven years.

SBP is striking a delicate balance between the need to raise interest rates to curb inflation and the need to keep interest rates from rising too fast because this may slowdown economic growth. Pakistan economy grew by an estimated 6.4 per cent in fiscal year ending in June and is targeted to grow by 6.6 per cent during this fiscal year.

OVERNIGHT RATES: As SBP sold higher than the targeted amount of treasury bills on Wednesday it is bound to create a slight shortage of liquidity in the inter-bank market on Thursday.