KARACHI, Sept 1: The State Bank on Wednesday raised the yields on three-month and one-year treasury bills by wider-than-expected margins to 2.23 per cent and 2.97 per cent respectively.

The central bank had to sell more than the targeted amount of Rs50 billion bills to raise the yields to these levels. It sold Rs61.5 billion bills against the target of Rs50 billion.

This clearly shows that the SBP is getting more serious about containing inflation. The central bank raised the weighted average yield by 11 basis points to 2.23 per cent on three-month bills and by 14bps to 2.97 per cent on one-year bills. In the last auction also the central bank had increased the weighted average yields on three-month and one-year bills by similar margins.

Most bankers were anticipating that SBP would raise the yields on these bills by not more than 10bps in Wednesday auction. But by increasing the yields by wider-than expected margins "SBP has restored the confidence of the market (in the central bank with regard to getting right signals)," said a foreign banker.

"They have showed that they are not as detached from the reality as some of us thought but they still have a lot of ground to cover," he said meaning that SBP will have to raise interest rates more aggressively to contain inflation. Consumer inflation in July 2004 shot up by 9.3 per cent over July 2003 up from 8.45pc in June. Data on August will be out in the second week of this month.

Monetary policy makers usually make practical moves to rein in inflation only when they have evidence that core inflation is on the rise. There are several definitions for core inflation.

But most commonly core inflation is defined as consumer inflation minus fuel and food inflation on which the impact of monetary policy is too limited. The government does not release figures for core inflation.

But as SBP continues sending signals about raising interest rates it is obvious that core inflation too has risen beyond the limits needed for allowing the economy to grow by the targeted pace of 6.6 per cent during this fiscal year.

In the last fiscal year when the economy grew by an estimated 6.4pc annualized consumer inflation rose to 4.57pc against the target of 3.9pc. The government plans to keep inflation at 5pc during this fiscal year but the Asian Development Bank warned in its latest report on Pakistan that it may reach 5.5 per cent due to higher oil prices.

The SBP has raised the weighted average yield on three-month and one-year treasury bills by 22bps and 28bps to 2.23pc and 2.97pc in two auctions held so far during this fiscal year.

It has raised the yield on six-month bills by 45bps to 2.52pc. The pace of increase in the T-bills yields within two months of the current fiscal year suggests that the yields on all the three T-bills may rise by not less than two percentage points at the end of the year in June 2005.

Many senior bankers say the increase may be even higher. In the meantime the central bank keeps its discount rate - the traditional anchor of the monetary policy - at 7.5pc unchanged since November 2002.

Senior bankers say the SBP would restart using it to signal shifts in its monetary policy after it manages to reduce the gap between T-bills rates and the discount rate.