KARACHI, June 22: The State Bank on Wednesday sent a clearer signal that it would keep interest rates stable to help the economy grow by a targeted rate of seven per cent in the next fiscal year.
It had sent this signal to the financial market also at the beginning of this month by allowing a modest rise in treasury bills after a short spell of aggressive hiking earlier in April and May.
On Wednesday, the central bank reinforced the same signal -— this time by keeping the cut-off yields on TBs unchanged at their June 8 levels.
The central bank kept the cut-off on the benchmark six-month bills at 7.9869 per cent -— unchanged from its previous level. It also maintained the cut-offs on three-month and one-year bills at the June 8 levels of 7.51 per cent and 8.45 per cent, respectively, results of the TBs auction announced by the SBP showed.
The SBP, however, facilitated a nominal increase in the weighted average yield of TBs of all three tenures. But even this was aimed at keeping their cut-offs unchanged, besides signalling that the SBP was ready to respond, should the need arise to tighten interest rates in future to contain inflation.
It sold Rs81 billion worth of three-month, six-month and one-year TBs combined four times the target of Rs20 billion but far below the demand of Rs116 billion.
The central bank raised the weighted average yield on six-month bills to 7.94 per cent from 7.90 per cent on June 8. It also raised the average yield on three-month and one-year bills to 7.48 per cent and 8.4 per cent, respectively, from 7.38 per cent and 8.29 per cent on June 8.
STABILITY: By keeping the cut-off yields on treasury bills unchanged the SBP has strongly reinforced its earlier signal that it now wants to maintain stability in the interest rates.
Since the start of the fiscal year in July 2004, it followed a gradual tightening of interest rates to keep inflation in check without hampering economic growth. The policy did pay with economic growth for this fiscal year, rising to 8.4 per cent from 6.4 per cent in the last fiscal year and exceeding the target of 6.6 per cent.
But as a higher economic growth coupled with some serious policy lapses pushed up consumer inflation faster than projected, the SBP tightened interest rates more aggressively in April and May this year than in the first three quarters of the fiscal year. On April 11, it raised its discount rate by one-and-a-half percentage points to nine per cent and then increased the weighted average yield on benchmark six-month TBs by 2.32 percentage points in two instalments. It did so to avoid a double-digit inflation for the entire fiscal year against the initial target of five per cent.
As a result of this and in response to some improvement in supply of essential food items, consumer inflation fell to 9.84 per cent year-on-year in May form 11.1 per cent in April. Inflation during July-May 2004-05, however, inched up to 9.33 per cent from 9.27 per cent during July-April 2004-05.
An aggressive interest rate tightening in April and May helped by improvement in food supplies is likely to keep full year inflation at around 9.4 per cent.
EXPORT FINANCE: The rate of export refinance, or the rate at which the central bank reimburses to the banks the money lent by them to eligible exporters, stands at 6.5 per cent for June 2005. This rate is likely to remain unchanged also in July, which means that export financing will continue to be available at a maximum eight per cent. (Banks can charge up to one-and-a-half percentage point premium over the export refinance rate while pricing export loans).
What is going to keep export financing mark-up unchanged at eight per cent for the next month and maybe for another couple of months is that weighted average lending rate of banks stood at 7.49 per cent at end-April and is unlikely to rise beyond eight per cent at end-June.
In 11 months of this fiscal year, the SBP continued to maintain a link between export refinance rate and weighted average yield on six-month bills to avoid subsidizing export finance that is also offered for six months.
But in June, it practically de-linked the rate of refinance from the average yield on six-month bills as the export finance rate had reached eight per cent -— closer to an expected average lending rate of the banks. (Data on banks’ average lending rate in June will be out in August).
Allowing the export refinance rate to rise further in line with the increase in the average yield on six-month bills would have pushed up the export financing mark-up above the average lending rate of the banks.
“And that would have looked very ridiculous .... as if we are penalizing our exporters,” remarked a central banker while explaining as to why the SBP kept the export refinance rate of 6.5 per cent fixed in May unchanged for June.
