KARACHI, July 21: The export finance rate that went up from 3 to 3.5 per cent in June and remains unchanged this month may rise to 4 per cent next month after the latest increase in six-month treasury bills yield.

The State Bank on Wednesday raised the weighted average yield on six-month bills by 45 basis points to 2.52 per cent from 2.07 per cent. The central bank did this while borrowing money for the government through T-bills at a regular auction.

It sold Rs67.5 billion bills against the target of Rs70 billion to raise Rs66.9 billion for the government. Earlier on July 7 the SBP had borrowed about Rs65.2 billion for the government by selling three-month and one-year T-bills.

Senior bankers say the 45bps increase in the weighted average yield on six-month bills will push up export refinance rate by about half a percentage point. Export refinance rate is the rate at which the SBP provides funds to the banks for onward lending to eligible exporters. The banks do so by adding a maximum markup of 1.5 per cent over the export refinance rate.

In May 2004 SBP had increased six-month T-bills yield to 2.07 per cent. That pushed up the export refinance rate - after 10 months - to 2pct. That in turn raised export finance rate or the rate at which banks provide loans to eligible exporters to 3.5pc in June.

The same rate remains applicable in July but with the increase in six-month T-bills yield on Wednesday it is bound to rise next month. The SBP uses weighted average yield on six-month T-bills as a benchmark to determine export finance rate.

The central bank raised weighted average yield on six-month bills on Wednesday to translate into action what it said in its monetary policy statement for July-December 2004.

The statement said SBP would make a smooth transition from an expansionary monetary policy stance to measured tightening to avert inflationary pressures and maintain stability in exchange rate.

"This measured response will have to ensure that the current growth and investment momentum in the country is not impaired in any significant manner, export competitiveness is maintained while inflation is kept under control," it added.

The increase in the T-bills yield was in continuation of the SBP strategy adopted since the middle of February this year to allow a gradual hike in interest rates.

The central bank had started this process to rein in galloping inflation. Consumer inflation or inflation measured by Consumer Price Index went up 4.57pc in fiscal year July-June 2003-04 against the initial target of 3.9 per cent.