KARACHI, May 11: The State Bank on Wednesday increased the cut-off yield on three-month and one-year treasury bills by one percentage point each in its fight against inflation. It sold Rs84.47 billion three-month bills at a maximum rate of 7.38 per cent, up from 6.39 per cent, thus allowing a rise of about one percentage point. It also sold Rs3.25 billion one-year bills at 8.25 per cent, up from 7.25 per cent. This is the second big increase in three-month and one-year government papers within a month.

On April 13, the central bank increased the cut-off yield on three-month and one-year bills from 5.95 to 7.25 per cent and from 5.01 to 6.39 per cent after increasing its discount rate on April 11 from 7.5 to 9 per cent. This huge increase in TBs yields indicates that the SBP is getting more serious in fighting inflation through making bank borrowing costlier and containing money supply. The private sector borrowed Rs362.4 billion from the banking system in nine months of this fiscal year exceeding the full fiscal year revised target of Rs350 billion and leaving even the last year’s exceptionally large credit offtake of Rs325 billion far behind.

This fast-paced increase in private sector credit and the resultant rise in money supply was one of the key reasons that led to an average annual increase of 9.06 per cent in inflation in nine months of this fiscal year. The SBP has forecast 8.2-8.8 per cent inflation for the current fiscal year ending in June and that makes a case for aggressive tightening of interest rates.

Initially, the government had set inflation target at 5 per cent for this fiscal year up from 4.6 per cent in the last year but a faster-than-targeted growth in economy and a host of other factors including cheaper bank credit accelerated the pace of inflation.

The State Bank has forecast 7.4-7.8 per cent economic growth for this fiscal year against original target of 6.6 per cent and last year’s growth of 6.4 per cent. On April 11 the central bank increased its discount rate — or the rate at which it lends money to banks against government securities for three days — from 7.5 to 9 per cent.

It then went for increasing T-bills rates much faster than in first nine months of the fiscal year. The combined result of discount rate hike — after 28 months — and a sharp increase in T-bills rate is that banks have started increasing their lending rates which would contain credit growth and money supply and check inflation. Statistics on bank lending rates in April would be out next month but senior bankers say banks have started increasing lending rates. One can have a clue about how the interest rates would impact bank lending rates from a dramatic rise in KIBOR or Karachi Interbank Offered Rate.

Six-month KIBOR shot up to 8.67 per cent on May 11 from 6.83 per cent on April 11. The central bank had increased the average yield on benchmark six-month T-bills from 5.51 to 7.08 per cent in late April in line with the April 11 hiking of discount rate which has already pushed up export finance rate from 6.5 per cent in April to 8 per cent in May.

As the SBP looks set to increase the yield on six-month bills again towards the end of this month the export finance rate would move further up. Top bankers say export finance rate may rise to 9 per cent next month.