KARACHI, March 16: The State Bank on Wednesday sold treasury bills worth Rs79.8 billion against the target of Rs50 billion, increasing the interest rates up to 24 basis points. The central bank raised the yields on government bills to contain inflation that looks set to rise by 9-10 per cent during this fiscal year, against the upward revised target of seven per cent. The central bank said it sold Rs77.2 billion worth of three-month bills and Rs2.6 billion one-year bills against the demand of Rs107.2 billion for three-month bills and Rs2.7 billion for one-year bills.
Bankers said the auction generated more-than-targeted amount of bids as banks had enough liquidity with them. Had the SBP not sold more than the targeted amount of TBs, the yield on three-month and one-year bills would not have reached the levels they finally touched.
That would have weakened earlier SBP signals that it would not mind increasing interest rates a bit sharper than in the past to check inflation.
Inflation rose by 9.95 per cent in the year to February 2005. It also increased by an average 8.91 per cent in July-February 2004-05, against the initial target of five per cent, which was later revised upward to seven per cent.
The State Bank increased the weighted average yield on three-month bills by 24 basis points to 4.94 per cent, from 4.70 per cent in February. It also raised the average yield on one-year bills by 23 basis points to 5.72 per cent, from 5.49 per cent.
Senior bankers said that by selling Rs79.8 billion worth of treasury bills against the target of Rs50 billion, the central bank not only reinforced its earlier signals that it would increase interest rates a bit faster to fight inflation, but also kept the liquidity levels within safe limits.
They said a huge inflow of Rs88 billion was due in the inter-bank market on Thursday, the day the settlement of Wednesday’s TBs auction would take place. Had the central bank stuck to the sale target of Rs50 billion, it would have left the market wallowing in excessive liquidity, lowering short-term interest rates and weakening the rupee.
Since the start of the fiscal year in July, the State Bank has been gradually increasing treasury bills yields to keep monetary expansion within limits, thereby containing inflation. But the pace of increase in interest rates has remained slower than required to ensure that inflation does not rise to disturbing levels.
In nine months to March 2005, the SBP has increased the weighted average yield on three-month and one-year treasury bills by three-and-a-quarter percentage points and three-and-a half percentage points, respectively. Between July 1, 2004 and March 2, 2005, it has also increased the average yield on benchmark six-month treasury bills by a little over three percentage points.
Whereas the increases in yields on three-month and one-year TBs have had an impact on overall interest rates structure, the spike in the yield on six-month TBs has made export finance costlier. In nine months to March 2005, the maximum mark-up on export loans has risen by two-and-a-half percentage points to six per cent, from 3.5 per cent at the end of June as the central bank raised export refinance rate, which is linked with the average yield on six-month TBs, from two to 4.5 per cent during this period. (Banks can charge up to 1.5 per cent spread on the SBP export refinance rate while offering export loans).
