KARACHI, Aug 3: The State Bank on Wednesday raised treasury bills yields modestly, signalling that it will continue to follow a tight monetary policy to contain inflation but will keep interest rates stable when possible.
The central bank increased the cut-off yield on benchmark six-month bills from 7.9869 to 8.0954 per cent at an auction of T-bills on Wednesday, results of the auction showed. The weighted average yield on six-month bills also went up from 7.9677 to 8.0231 per cent.
The SBP sold Rs13.375 billion worth of six-month bills -— less than half the demand for Rs26.875 billion. Had the central bank sold a bigger amount of the bills it would have to raise their yields further. That would have sent a wrong signal to the market about the SBP stance on monetary policy.
In its policy statement for July-December 2005 issued last month, the central bank said that it would continue to follow a tight monetary policy until inflationary pressures were eased off. It also said that the extent of interest rate changes would be determined “by magnitude, direction and speed of inflationary pressure”.
The State Bank, after making frequent but gradual and measured increases in TBs yields in the first three quarters of the last fiscal year, had gone for aggressive interest rates hiking in April-May as inflation was getting out of control. From June, however, the central bank has been following a policy of making measured increases in TBs yields punctuated with periodical stability keeping in view the rate of acceleration in inflation.
The last fiscal year has closed with consumer inflation reaching 9.28 per cent as the economy grew by a record 8.4 per cent. As inflation in the last month of the outgoing fiscal year showed signs of moderation, this has created room for the central bank to go for gradual hiking of interest rates instead of making aggressive moves.
It is against this backdrop that in Wednesday’s auction the SBP increased the cut-off and weighted average yields on benchmark six-month TBs by about 11 basis points and five basis points only.
The results of the auction show that the central bank also raised the cut-off yield on three-month TBs from 7.6946 to 7.8297 per cent, allowing an increase of 13 basis points. The weighted average yield on the paper rose from 7.6946 to 7.7488 per cent, registering a rise of five basis points only. The SBP sold Rs6.75 billion worth of three-month bills against the demand of Rs19.8 billion.
The cut-off yield on one-year treasury bills went up from 8.6959 to 8.7907 pr cent, showing an increase of about nine basis points. The weighted average yield on the paper rose from 8.6884 to 8.6986 per cent, recording a negligible rise of just one basis point.
The central bank sold Rs38.35 billion worth of the one-year bills against the demand of Rs45.1 billion.
In all, the SBP sold Rs58.475 billion worth of treasury bills of the three tenures, far below their cumulative demand of Rs91.775 billion. The selling amount also fell short of the target of Rs75 billion set for the auction.
Senior bankers said had the SBP sold the targeted amount of TBs it would have to make sharper increases in the bills of all the three tenures. That obviously was not the SBP idea because inflation has not only moderated in June but is also likely to remain subdued in July, data for which would pour in sometime next week.
The government has set an inflation target at eight per cent for this fiscal year. The target for the economic growth has been set at seven per cent.
