KARACHI, May 25: The State Bank on Wednesday raised the weighted average yield on six-month treasury bills by about three quarters of a percentage point to 7.82 per cent.
The SBP action apparently aimed at containing soaring inflation should increase the rate of export finance to nine per cent next month unless the central bank decides to de-link this rate with the six-month TBs yield or cap it where it at its May level of eight per cent.
The SBP raised the average yield on benchmark six-month bills by 74 basis points to 7.82 per cent from 7.08 per cent in late April, results of the TBs auction announced by the SBP showed.
The central bank had set the sale target for TBs at Rs12 billion, but it sold only Rs510m worth of bills apparently to avoid a sharper increase in the yield. The auction had generated Rs22.7bn worth of demand for six-month bills and had the SBP accepted even Rs12bn bills it would have to increase the weighted average yield beyond eight per cent.
That the central bank deliberately kept the average yield below eight per cent, indicates that it is in no mood now to let the yield rise too sharply. But at the same time it also wants to reinforce its earlier signals that interest rates would be tightened aggressively to contain inflation.
Year-on-year inflation in April 2005 shot up to 11.1 per cent and even the average inflation in July-April 2004-05 stood at 9.27 per cent — against the full fiscal year target of five per cent. The SBP said in its third quarterly report released here the other day that it expected inflation to reach at 9.0-9.4 per cent during this fiscal year ending in June.
The central bank started tightening interest rates in a big way from April 11 when it increased its discount rate by one-and-a-half percentage points to nine per cent after 28 long months. Earlier between July 2004 and March 2005, it kept increasing six-month T-bills rates in small steps with the result that this gradual tightening could not kill inflationary expectations and inflation went up and up.
Businessmen now complain that the sudden shift in the SBP monetary policy from gradual to aggressive tightening of T-bills rates is costing them dearly. Sharp increases in six-month bills are not only making export finance costlier every month, they are also making all those loans dearer that were obtained on floating rates with TBs yield serving as base rate.
“This is a very difficult situation for exporters in particular and for other businesses in general,” says Iqbal Ibrahim, a leading textiles exporter. Almost all business leaders, including those at the helm of the Federation of Pakistan Chambers of Commerce and Industry, have shown resentment over frequent and sharp increases in export finance rate. Some of them have even demanded de-linking of this rate with the six-month T-bills yield and some have called for capping it at a given level. But the central bank has not paid much heed to such talk for the reason that if export finance rates are de-linked from six-month bills rate or if it is capped at a certain level, it would distort overall interest rate structure in the country.
Central bankers also point out that since export finance forms a very small percentage of overall private sector credit, increase in its rate should not be seen as a factor that can destabilize businesses. But businessmen say that as the six-month TBs yield is used frequently as a base rate while pricing short-term loans, any increase in it makes the loans taken on floating rates costlier. Besides, as the six-month bills rate moves aggressively up, all other interest rates follow the trend with the result that overall cost of borrowing becomes higher. That exactly is what the SBP wants to do — make bank borrowing costlier to reduce private sector credit volumes and in turn squeeze money supply to contain inflation.
