KARACHI: The Karachi Inter-Bank Offered Rate (Kibor) on Tuesday reached a 13-year high at 14.1 per cent, reflecting the growing pressure for another interest rate hike to counter a number of factors already challenging the current policy rate.

Sources in the financial sector said several factors have collectively made ground for another interest rate hike in the coming days or weeks.

Analysts said the cut-off yields on six-months treasury bills (T-bills) are already 160 basis points ahead of the policy interest rate. In the previous auction, six-month T-bills were sold at 13.85pc. The policy interest rate is 12.25pc after an increase of 250 basis points announced in an emergency meeting of Monetary Policy Committee of the State Bank of Pakistan (SBP) earlier this month.

“There is a possibility that the six-month benchmark treasury bills would see an increase 25 to 40 basis points in the auction to be held on Wednesday,” said SS Iqbal, a money dealer in the banking market. He said the secondary market sold six-month T-bills with cut-off yield 14.10pc on Tuesday.

The Kibor reached 14.10pc which was the highest level since February 19, 2009.

“If the government needs money and the banks are the only major sources, the banks stand to benefit from it. They will lend the government at higher rates in the next auction,” he said.

The International Monetary Fund (IMF) has already barred the SBP from lending loans to the federal government since 2018.

Analysts cited rising inflation, which reached 12.7pc in March, as another major factor in raising interest rates and mitigating the negative effects of higher inflation.

“Inflation will certainly go high when the petroleum prices are increased by the new government,” said Samiuallah Tariq, head of research at the Pak-Kuwait Development and Investment Company.

The current inflation rate is 12.7pc, while the interest rate is 12.25pc, indicating that the real interest rate is negative.

Inflation is expected to catch fire after an increase in oil prices. One of the IMF’s conditions is to remove the relief on petroleum prices, which was fixed by the previous government till the new budget (June) while relief on electricity is also provided.

The previous government had announced that the extra revenue collections allowed her to pass on this benefit to the general public and industry. The additional amount expected to be collected in this fiscal year FY22 was Rs274 billion, which was allocated to provide relief on oil and electricity to the general public.

However, the new government argues that there was no extra collection of revenue. Minister of Finance Miftah Ismail said oil prices would be increased from May 1. He told the public not to fill their car tanks with fuel since there was no possibility of an oil price increase before May 1.

“This expected increase in petroleum products will escalate inflation, making it harder for the SBP to remain committed to the same current interest rate,” said Mr Tariq.

Published in Dawn, April 27th, 2022