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KARACHI, June 8: After raising interest rates too quickly in April-May, the State Bank has reverted to its earlier stance of gradual hiking to ensure that its fight against inflation does not hamper economic growth. Inflation rose at an average annual rate of 9.27 per cent in July-April 2004-05 and is likely to end up around 9.4-9.7 per cent at the end of the fiscal year this month. (Inflation data for full fiscal year will be out in July).
Meanwhile, Pakistan’s economy is estimated to have grown 8.4 per cent during this fiscal year and the government wants to achieve the economic growth target of seven per cent next fiscal year while keeping inflation at eight per cent. Whereas the central bank is struggling hard to keep inflation below 10 per cent during this fiscal year and bring it down to eight per cent in the next fiscal, it is also trying to ensure that anti-inflationary moves do not impede the targeted economic growth.
On Wednesday, the central bank sold Rs108.6 billion worth of treasury bills against the target of Rs77 billion and raised their yields modestly to the levels it wanted the market to read as indicative. It raised Rs108.6bn through sale of TBs at the first joint auction of three-month, six-month and one-year bills since October 2002.
In April-May this year the central bank had to increase the yields on TBs faster than in the past to rein in galloping inflation. But earlier this month it indicated that it would revert to gradual hiking of the yields to ensure that its fight against inflation does not eclipse the prospects of economic growth.
The SBP reinforced this signal on Wednesday by increasing the weighted average yield on benchmark six-month treasury bills by only eight basis points to 7.90 per cent from 7.82 per cent in late May.
The central bank sold Rs23.3bn six-month bills against the demand of Rs33.5bn to keep the average yield at this level.
By keeping the average yield on six-month bills below eight per cent, the central bank has signalled clearly that the days of aggressive hiking of interest rates are over. After raising its discount rate by one-and-a-half percentage points to nine per cent on April 11, the SBP had increased the average yield on six-month bills by 2.32 percentage points in two phases till the end of May.
EXPORT FINANCE: Though the average yield on six-month bills has reached near eight per cent, the State Bank is not going to increase its export refinance rate to this level.
Sources close to the SBP say the export refinance rate -— or the rate at which the central bank reimburses funds to the banks against their lending to eligible exporters -— would remain unchanged at the present level of 6.5 per cent till the time when the weighted average lending rate of banks rises past eight per cent. For the month of June, the export finance rate or the maximum rate at which banks make export loans is eight per cent (1.5 percentage points over the export refinance rate of 6.5 per cent). Data on weighted average lending rate of banks for the month of June are not available but at end-April the rate was 7.49 per cent and is likely to remain around eight per cent at the end of June.
Another way to look at the issue of export finance rate is that as the interest rate structure has become more market-oriented, the SBP can now link it directly with the weighted average lending rate of the banks —- instead of keeping export refinance rate at par with the average yield on six-month bills and then allowing banks to charge 1.5 percentage points over it while pricing export loans.
YIELD CURVE: On Wednesday, the SBP also sold Rs73.3bn three-month TBs against the demand of Rs84.2bn and raised its weighted average yield by 35 basis points to 7.38 per cent from 7.03 per cent in May. As for one-year bills, the central bank sold Rs12bn of them against the demand of Rs16.4bn and raised their weighted average yield by 38 basis points to 8.29 per cent from 7.91 per cent in May. The new yields on three-month, six-month and one-year bills provide a better yield curve than in the recent past and signal to the financial market that the central bank would possibly maintain it for the sake of interest rate stability.
