KARACHI: After an unexpected increase of up to 129 basis points by the government in Wednesday auction, the cut-off yields on treasury bills hit a 22-year high creating a large room for further hike in the State Bank of Pakistan (SBP) policy rate.

In the first week of this month, the central bank had increased the benchmark interest rate by 250 basis points to 12.25 per cent to counter the growing inflationary pressure and rising cut-off yields on T-bills.

The SBP on Wednesday reported that the government increased the benchmark six-month T-bills rates by 114 basis points to 14.99 per cent. Money market experts were not expecting such a high rate as it has reduced profits on their previous investments in T-bills.

The cut-off yield on six-month T-bills is now higher by 274bps when compared with the SBP’s current policy rate at 12.25pc.

Returns on govt papers touch 22-year high, at almost 15pc

Before the announcement of monetary policy on April 7, the market was expecting a hike in interest rate since the cut-off yields on T-bills were much higher than the benchmark interest rate while the consumer prices were also rising each month.

In its monetary policy statement, the SBP had noted that increasing the interest rate was a necessary as market yields of T-bills were not in line with policy rate creating an abnormal situation.

In April 6 auction, the cut-off yields on six-month T-bills were raised by 75 basis points to 13.25pc while the SBP’s policy rate was 9.75pc.

The increase in the cut-off yield of 6-month T-bills to almost 15 on Wednsday created enough room for policy interest rate hike.

“The government needs money to meet the fiscal gap and the banks were asking for higher returns which forced the borrower to increase the cut-off yields, but the hike of up to 129 basis points is a surprise for the market,” said S.S. Iqbal, a money market expert and dealer.

“I believe the SBP policy rate will be increased by 100 to 150 basis points in next review to counter the situation developed after higher cut-off yields and 12.7pc inflation noted in March,” he added.

For the last two auctions the government has been borrowing more than the targets.

The government raised Rs672bn (including Rs58bn of non-competitive bids) against the target of Rs500bn in the latest auction.“Printing of currency notes is not the right thing but a proper coordination between the Ministry of Finance and the State Bank is required to deal with the situation. They can do many things in the short-run including rejecting bids at higher levels,” said Mohammad Sohail, CEO of Topline Securities.

The yield on three-month papers was increased by the highest 129bps to 14.79pc while on the 12-month by 96bps to 14.81pc.

“The cut-off yields today touched 22-year high and the Karachi Interbank Offered Rate is at 13-years high. The increase is primarily due to rising inflationary pressures once the government rolls out petroleum and electricity subsidies,” said Tahir Abbas, head of research at Arif Habib Ltd.

In addition, high fiscal deficit expectations also keeping the borrowing rate upwards. The SBP should intervene in the secondary market to ease liquidity crunch, he added.

“I think the banking system needs liquidity to calm down the market. To quench the government’s thirst, the SBP can intervene too or the government should attract foreign flows into the banking system like foreign investment in T-bills,” said Samiullah Tariq, head of research at Pak-Kuwait Development and Investment Company.

Published in Dawn, April 28th, 2022