KARACHI: After an unexpected jump in treasury bill rates, returns on Pakistan Investment Bonds (PIBs) have jumped by up to 145 basis points, indicating an interest rate hike is imminent.

Thursday’s PIB auction further made it clear that the new government is in a hurry to generate revenue, as it raised more than thrice the targeted amount.

The race to borrow maximum in a brief period allowed the banks to increase their demand for high returns, which has been accepted both in treasury bills and PIBs.

The cut-off yield on three-year PIBs rose 145 basis points to 13.3 per cent in the latest auction, whereas the amount raised by the government stood at Rs26.92 billion.

It raised Rs 62.75bn for 5-years Rs286.16 10-years PIBs.

Analysts say an interest rate hike is around the corner

The return on the five-year tenor increased by 120bps to 12.95pc and on the 10-year tenor jumped by 141bps to 13.15pc.

Accepted bids amounted to Rs62.75bn for five-year PIBs and Rs286.16bn for 10-year bonds. However, no bids were received for 15-, 20- and 30-year tenors.

All told, the government raised Rs375.8bn during the PIB auction against the target of Rs100bn.

On Wednesday, the government increased the treasury bill rates by up to 129bps. Cut-off yields for three-, six- and 12-month papers rose to 14.79pc, 14.99pc and 14.81pc, respectively.

The return on benchmark six-month treasury bills now exceeds the State Bank’s policy rate by 274bps. Analysts say the large gap means an interest rate hike is around the corner.

Earlier this month, the central bank raised the interest rate by 250bps to 12.25pc. The situation was not different then, as both treasury bills and PIB rates had gone far beyond the policy interest rate at that time. The SBP then described the situation as abnormal and said it was not in line with the monetary policy.

Money dealers and researchers said the benchmark six-month Karachi interbank offered rate, or Kibor, reached 14.96pc on Wednesday, the highest level since Jan 31, 2009 when it reached 15.1pc.

Returns on treasury bills have also touched a 24-year high of almost 15pc. Now the increase in yields of PIBs has supported analysts’ assessments that interest rate is bound to increase.

They said it was also necessary to counter the rising inflation, which now stands at 12.7pc, especially at a time when the International Monetary Fund is reportedly urging the government to bring down the fiscal deficit.

The government is raising the cost of money to reduce the fiscal deficit and control inflation. The increased cost of money will hit the trade and industry, while more inflationary pressure is expected in the wake of abolishing the relief on petroleum products and electricity.

The government has already allowed an increase in electricity rates and the decision has been quickly implemented.

Though the new government baulks at increasing oil prices due to high political and economic costs, many in the financial circle believe an oil price hike is imminent after Eidul Fitr.

Published in Dawn, April 29th, 2022