January 5, 2006	Thursday	Zilhaj 4, 1426

KARACHI, Jan 4: The State Bank on Wednesday lifted the targeted liquidity and maintained the status quo, with no change in cut-off yield of treasury bills despite a clear indication of higher inflation figure for December 2005.

Almost half of the financial year 2005-06 has gone, but the SBP has kept tight monetary policy and remained stick to its stance despite a pressure in the wake of higher inflation.

The SBP, which has been using T-bills and OMOs to curtail the inflationary pressure, sold treasury bills worth Rs46.726 billion through an auction on Wednesday, while the market received an inflow of Rs58 billion. The cut-off yields on three-month, six-month and 12-month were 8.1 per cent, 8.29 and 8.79 per cent, respectively.

Analysts said the central bank was not ready to take risk before the review of monetary policy scheduled for the last week of the current month, with a new governor in the office.

“Inflation numbers for December 2005 are likely to be significantly higher than last month’s 7.89 per cent (year-on-year),” said Salman Jaffrey, analyst at Jahangir Siddiqui & Co.

The analysts expect that the CPI inflation for December could be around 8.5 per cent, which was 7.89 per cent for November. The increase in prices of gas and recent jumps in the international oil markets are likely to keep the inflation above the government’s target of eight per cent during the first three months of 2006.

Banks kept their investment trends intact and highest bids offered for one-year T-bills are reflecting their confidence in the ongoing tight monetary policy. They believe that interest rates would remain stagnant for a longer period like one year. The banks offered Rs35 billion for one-year T-bills and the SBP picked up Rs31.930 billion.

The SBP picked up Rs13.547 billion for three and Rs1.248 billion for six-month T-bills. The SBP kept the spread between three-month and 12-month treasury bills high, providing opportunity to the banks to earn more money by using the 12-month paper. Banks can pledge their 12-month paper for three months in the inter-bank market to get a better rate.

The analysts said that the high inflation rate would put pressure on the SBP to review the monetary policy instead of endorsing the ongoing policy track.

Market experts said that in the presence of tight monetary policy, the higher inflationary figure would create problems for managing the low interest rate policy. They said the SBP might come up with another OMO (open market operations) to keep the market tight as it left some liquidity.

However, some bankers said that the leftover liquidity would be utilized by the public because of Eid falling in the second week of this month.