KARACHI: An interest rate hike of around 200 basis points by the State Bank of Pakistan (SBP) is highly likely, financial market experts say, after the recent treasury bill auction rates saw a similar increase.

While the unexpected rate jump in the government auction to raise domestic debt surprised the trade and industry, the investors in the treasury bills found the situation suitable due to over 27 per cent inflation.

The government raised Rs258 billion against the target of Rs300bn in Wednesday’s auction at the rates of 19.95pc, 19.9pc and 19.79pc for the three-month, six-month, and 12-month tenors. The cut-off rates were 195 bps, 206 bps, and 184 bps higher than the previous auction, respectively.

The government plans to raise Rs1,800bn in the next auction scheduled for March 8 while the maturity amount is Rs1,785bn.

The amount raised at these rates would be too costly for the government, which is already facing a liquidity shortage. The costly borrowing will also eat up most of the budget allocations.

Expectation follows similar rise in T-bill yields

The SBP’s policy rate is 17pc at present, which means the treasury bills rates were almost 300 bps higher.

The next meeting of the SBP’s monetary policy committee is scheduled for March 16, though off-cycle rate reviews are not uncommon.

“We support the use of monetary policy to rein in inflation, anchor inflation expectations, and support the exchange rate,” said Esther Perez Ruiz, the IMF’s resident representative in Pakistan, in an email to Reuters.

“As such, monetary policy has an important role to play in taming inflation and preserving the purchasing power of Pakistanis, first and foremost the poor and most vulnerable.”

A senior banker believed the State Bank would have to increase the interest rate by 200 bps in the coming days even if it considers 12-month average inflation. He said that though there was no movement in the SBP for increasing the interest rate, Friday was open for such a move.

Adnan Sheikh, assistant vice president of research at Pak Kuwait Investment Company, also told Reuters that a rate hike is imminent, and it could be as soon as Friday.

“The next policy meeting is too far. Given the circumstances, it’s already being priced in,” he said.

The government has announced several austerity measures to cut expenditures to save up to Rs200bn, but still it needs to generate at least Rs500bn. Poor economic growth and a steep fall in imports slashed revenue generation.

Researchers and economists said the repayment of costly short-term borrowing would further increase the fiscal deficit, which is unacceptable to the IMF.

“We were short of dollars. Now it looks like we are short of rupees, which is another bad sign for the economy,” said a senior analyst.

Published in Dawn, February 24th, 2023