KARACHI: The government has further raised the returns on treasury bills (T-bills) by up to 80 basis points indicating the stage is set for increase in State Bank of Pakistan’s (SBP) policy rate in the next monetary policy review.

For the last two T-bill auctions, cut-off yields were increased to avoid negative returns in view of high inflation which reached 12.7 per cent in March.

The SBP has been trying to keep the interest rate unchanged at 9.75pc but in the last monetary policy announced in March it was made clear that the interest rate could be changed, if needed.

However, the current trend shows that the frequent increase in the cut-off yields of all the tenures, a change or increase in the policy interest rate is must.

Stage set for interest rate hike

The government increased the interest rate by 80 basis points to 12.8pc for three-month T-bills, while an amount of Rs373.3 was raised against bids of Rs505bn.

In the previous auction held on March 22, the rate for the same three-month T-bills was increased by 55basis points. This shows that in two weeks, the rates were cumulatively increased by 135 basis points.

The cut-off yield for six-month T-bills was raised by 75 basis points to 13.25pc; much ahead of the policy interest rate of 9.75pc. It clearly shows that the interest rate is now required to be increased significantly in next monetary policy scheduled on April 19. The government raised Rs148.2bn for six-months papers against the bids of Rs190.5bn.

The government increased return on 12-month T-bills by 60 basis points to 13.3pc, while it raised Rs123.5bn against the bids of Rs215.4bn. In the previous auction, the cut-off yields were increased by 40 basis points for six and 12-months papers.

The cumulative amount of Rs680 billion (including Rs34.8bn through non-competitive bids) was raised against the target of Rs600bn set for the auction.

Such high attractive rates were eagerly accepted by the financial sector and the amount doubled than the target was offered to buy T-bills. The financial sector (banks) earned record profits in the calendar year 2021.

While the domestic investors found it the most attractive investment as it will yield risk free high profits, the foreign investors have left the ground. More than $467 million left the country from T-bills and $379m from Pakistan Investment Bonds (PIBs) during FY22.

The yields on both the domestic bonds were much higher than the available rates in the international market. Now, however, foreign investors are concerned about the political uncertainty in the country which will have an impact on economic policies.

Financial circles believe that the policy interest rate is bound to increase in coming days but it would also support the inflation to increase since the cost of money would be higher that will ultimately hit investment and growth. The country achieved over 5pc growth rate in FY21 due to supply of cheaper money in the wake of pandemic. FY22 could see a growth rate of 4-5pc as expected by the State Bank.

The government raised Rs33.8bn through auction of PIBs. It raised Rs3bn for two-year and Rs29.8bn for three-year bonds.

Published in Dawn, April 7th, 2022

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